Will Sunocos Separation Increase Shareholder Value?
Will Sunocos Separation Increase Shareholder Value? Back to News

Separation of SunCoke Energy
Sunoco announced the separation of SunCoke Energy from the rest of Sunoco to be completed sometime in 2011. The company is still investigating the best method of this separation, including a possible spinoff, with the stated goal of an eventual 100% separation. 

The company gave the usual litany of reasons for a separation of two disparate businesses, including more focus by each individual part, a lack of common customers or integration between the businesses and differing business models. Sunoco also believes that the market undervalues the existing company and a full separation will lead to increased shareholder value.

SunCoke Energy operates a metallurgical coke processing business and produces millions of tons of coke for sale to the steel making industry. The company's plants are located next to steel plants to facilitate delivery of the coke. The plant in Indiana sells its output to an Arcelor Mittal (NYSE:MT) facility, while a plant in Illinois sells its output to a U.S. Steel (NYSE:X) facility. This is a growth business due to the demands for steel to build out infrastructure in developing economies like China and India.

Refining and Marketing
Sunoco has spent the last year cutting costs and rationalizing its business through cutting costs and selling non-core assets. This has led to a sharp decrease in cash costs per barrel in the company's refining business. This metric has fallen from $5.13 per barrel in the fourth quarter of 2008 to $4.48 per barrel in the first quarter of 2010. Sunoco has also reduced capital spending here over the last few years. These actions have led Sunoco to expect a profit in its refining segment for the quarter ending June 30.

Sunoco has a large marketing footprint in the eastern United States, with 4,711 retail outlets and 4.9 billion gallons of fuel sold in 2009. This segment produced $241 million in EBITDA in 2009, and the company hopes to manage its capital spending going forward to keep cash flow here steady.

The company also owns 33% of Sunoco Logistics Partner L.P. (NYSE:SXL), a master limited partnership that owns thousands of miles of pipelines and product terminals. The company hopes to grow here to meet the needs of biodiesel and ethanol producers, as more alternative fuels enter the market.

The Bottom Line
Sunoco is hoping that the sum of the parts is greater than the whole, and will separate it coke business from the rest of Sunoco in 2011. The company is also seeing the fruits of cost cutting and streamlining and will see a profit in its refinery segment in the upcoming quarter. (Companies use M&As and spinoffs to boost profits - learn how you can do the same.