These are strange days in the refining industry, as more and more companies decide that it's time to go big, go independent, or go home. Several major integrated oil companies have started talking about dis-integrating their refining and marketing operations from their oil and gas exploration activities, and Marathon recently did so - splitting itself into Marathon Oil (NYSE: MRO) (an oil and gas exploration company) and Marathon Petroleum (NYSE: MPC) (a refining and marketing company).

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Now it's Sunoco's (NYSE:SUN) turn. The company has been quite active already; selling refining facilities in Oklahoma and Ohio, selling its chemicals business, and spinning out its coke operations. Now the company is taking a larger step further - announcing that it intends to sell its two remaining refineries (both in Pennsylvania) and exit the refining business altogether.

A Logical Step Aside
Apart from Sunoco's long history as a refiner, this decision to exit the refining industry makes a lot of sense. This is a tough business all around - environmental worries make new construction difficult, efficiency requires high ongoing capex, and margins are cutthroat. Making matters worse for Sunoco, the company's Pennsylvania refineries use light sweet crude and have high costs all around because of the feedstock it uses and how it is transported to the refineries. With practically no pricing power, Sunoco has been forced to accept years of losses from this business.

So, Sunoco has made the decision to leave refining to the likes of Valero (NYSE: VLO), Tesoro (NYSE: TSO) and ExxonMobil (NYSE: XOM). That said, even this decision may not be easy - although private equity buyers have shown interest in East Coast refining assets, there aren't a large number of likely buyers. That could lead Sunoco to some interesting "Plan B" options, as it is often more sensible (and economical) to repurpose refineries instead of shutting them down completely due to environmental regulations.

The New Sunoco
What is Sunoco going to be after exiting the refining industry? For starters, this is a company with a large retail fuel network - Sunoco owns more than 4,900 fuel stations and 600 convenience stores. What's more, the company has a 31% interest in Sunoco Logistics (NYSE: SXL) - a limited partnership that owns pipelines and terminals - and an 81% interest in SunCoke (NYSE: SXC), which produces coke for steelmakers.

Sunoco also has a sizable cash position and the steady cash flow from Sunoco Logistics should be supportive of the company's balance sheet. While the company already has a large buyback program in place, additional cash from refinery sales could boost this option or give the company ammunition for new ideas.

It's unclear whether Sunoco really needs (or wants) to expand its gas station footprint, but the acquisition of a company like Pantry (Nasdaq: PTRY) or Sheetz could make some sense. Likewise, it could make sense to use the balance sheet to buy stakes in other pipeline, terminal or midstream assets - turning Sunoco into a powerful cash-generator. Alternatively, management could make the difficult and rare (though often shareholder-friendly) decision to basically just run off the assets it has and return cash to shareholders.

The Bottom Line
It is hard to lament a company exiting a low-margin, low-return business that has been delivering losses for years. There is certainly going to be some doubt and uncertainty in the meantime as shareholders wait to see what management can get for those refineries and what, exactly, the company is going to look like after the deal. With the performance of the stock market turning up so many other values and bargains, it is difficult to argue that investors need to take on the risk and uncertainty offered by Sunoco shares today, but management should be praised for making some very logical and shareholder-friendly decisions. (For additional reading, see What Determines Oil Prices?)

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Tickers in this Article: SUN, MRO, MPC, VLO, TSO, XOM, PTRY

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