Beginning in the early 1990s, integrated oil companies and some independents began stripping away their midstream assets like interstate pipeline and gathering systems to focus more on the money-making parts of the oil and gas business. The recent trend has been to spin-off or sell downstream assets, primarily refineries, which usually react wildly to changes in crude oil prices. And no one needs to be reminded of the volatility in crude prices.

Sunoco, Inc. (NYSE: SUN) has decided that now is the time for it, too, to shed its refining operations. The company wants to sell two refineries on the east coast with a combined capacity of 505,000 barrels/day of throughput. Sunoco will take an impairment charge of up to $2.2 billion in its third quarter and has warned that the costs of closing the plants could rise by another $500 million.

That’s if Sunoco can’t find a buyer for the refiners.  If no buyer steps up, Sunoco will close the refineries in July 2012. The company said it could record a pre-tax gain of about $2 billion if it sells or closes the refineries. It’s not an idle exercise to wonder if there are any buyers left.

Here’s a review of recent refining changes. Marathon Oil Corp. (NYSE: MRO) spun off its refining to a new company, Marathon Petroleum Corp. (NYSE: MPC). ConocoPhillips Corp. (NYSE: COP) has announced that it will spin-off its refining operations this year. Valero Corp. (NYSE: VLO) acquired a refinery in the UK from Royal Dutch Shell plc (NYSE: RDS-A) and just last week bought a refinery in Louisiana from Murphy Oil Corp. (NYSE: MUR).

The logical buyer, Valero, has spent about $2.625 billion so far this year on refining acquisitions. The company reported about $4 billion in cash and $6.8 billion in long-term debt in its last quarterly earnings. It could conceivably pony up the money for the Sunoco refineries. Marathon, with a market cap of more than $12 billion, holds about $1.6 billion in cash and long-term debt of about $3.2 billion. No other refiner is a likely prospect.

It looks like Sunoco may have waited too long to put its refineries on the market. The company has another problem as well. According to the company’s most recent 10-K, the east coast refineries get their feedstocks from foreign sources, primarily Nigeria. Just 13% of the company’s feedstocks are domestically sourced.

That means that Sunoco, or a potential buyer, will be paying Brent crude prices, currently about $15/barrel more than US WTI crude. Other US refiners with access to WTI crude are able to turn that $15/barrel differential into profits. The Sunoco refineries can’t do that. That’s not a selling point.

Still, Sunoco’s announcement has boosted the share price by nearly 4% just before noon today, to $37.50, in a 52-week range of $26.93-$46.98.

Paul Ausick

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