Sunoco CEO leaves as downturn takes hold
John G. Drosdick's eight-year tenure as Sunoco Inc.'s chief executive officer spanned some of the most profitable years ever for oil refiners.
But as Drosdick steps down this week, the refining industry is back where it was when he joined the Philadelphia company as chief operating officer in 1996: in the doldrums, facing a round of lean years.
It was not supposed to be this way, according to industry bulls, who expected the fat profits of 2004 through the first half of last year to last through this decade.
Instead, refiners are reporting sharp year-over-year declines in profit. Their operating costs have soared while gasoline supplies are up, motorists have cut back on driving, and rising crude prices have outpaced price increases for key refined fuels.
Sunoco is to report second-quarter results tomorrow, and analysts are expecting it to rebound from two straight quarterly losses with a profit. If so, it will likely be a small fraction of the $509 million, or $4.20 a share, reported a year ago, when industry profits peaked.
Drosdick, a chemical engineer by training who began his career with Exxon Corp. 40 years ago, anticipated a downturn - warning in 2004, for example, that while oil refining is "very seductive" during booms, it remains cyclical.
That stance earned him a reputation as a conservative executive at a time when rival Valero Energy Corp. became the nation's largest refiner through acquisitions.
"Drosdick always seemed to be preparing for that moment when the amazing profits would not be there," said Beth Evans, managing editor for Platts Oilgram News, a trade publication.
That time has come. "The Golden Age of refining is behind us, and we are entering the Dark Ages," Credit Suisse analyst Mark Flannery wrote in a note to investors last month.
Drosdick, who turns 65 this month, announced his retirement in July and has since declined to be interviewed. He is expected to remain chairman until the end of the year.
His successor, Lynn Laverty Elsenhans, will join Sunoco on Friday from Shell Downstream, where she overhauled the U.S. refining and marketing operations of Royal Dutch Shell P.L.C.
With Sunoco's shares off 59 percent since peaking in January 2006, some have speculated that Elsenhans could be coming in to execute an operations shake-up.
Adding fuel to that fire was the recent disclosure by Harbinger Capital Partners, a private-equity investor known as an agitator for changes at underperforming companies, that it had accumulated a 6.62 percent stake in Sunoco.
Sunoco already has said it is considering putting its chemical-manufacturing operations, which contributed about 7 percent of the company's revenue last year, into a joint venture.
In 2001, Sunoco doubled the size of its petrochemicals business with the $695 million purchase of Aristech Chemical Corp. in a bid to lessen the volatility of its earnings from oil refining. But the strategy did not work as well as expected.
That large chemical business, as well as a division that makes fuel used in steel manufacturing, have made Sunoco something of an oddball among independent refiners - those that do not explore and drill for oil. They buy their oil, making them victims of high crude prices.
Sunoco also stands out because its refineries are set up to handle light, sweet crude oil. While it is easier to process than its heavy, sour counterpart favored by many refiners, it is often significantly more expensive.
In the second quarter, for example, the closely watched light, sweet crude benchmark West-Texas Intermediate cost $20.99 a barrel more on average than Mexico's Maya crude, a heavy, sour benchmark, according to Valero Energy.
Even though it costs more to process, heavy, crude refiners usually make more money per barrel of oil because of the discount. That is why much additional U.S. and foreign refining capacity planned through 2010 is geared toward heavy crudes.
U.S. refiners, spurred by tight gasoline supplies in 2004 and 2005, plan to add 640,000 barrels a day of refining capacity through 2010, according to Credit Suisse. If it all gets built - which is doubtful because of the poor refining outlook - it would represent a 3.4 percent increase from the beginning of this year.
While Drosdick's priority was to get more out of the refineries Sunoco already owned, he expanded the company with the $250 million purchase in 2004 of the Eagle Point refinery in West Deptford Township.
The company also spent $525 million in 2006 and 2007 to upgrade and expand a key unit at its South Philadelphia refinery to make more gasoline, diesel and jet fuel.
Perhaps the biggest problem for Sunoco and other U.S. refiners now is weak domestic demand for gasoline, which is their main product.
Demand fell 2.6 percent in June and July, compared with last year, according to the federal Energy Information Agency. Those numbers include ethanol blended into gasoline, so oil refiners are facing an even steeper decline.
Analysts say consumption is likely to continue its downward trend for years, with public transportation gaining, the frequency of trips to the store declining, and sales of gas guzzlers plummeting.
All of that means the short-term "prospects for a gasoline market revival are dim," Flannery said.
Contact staff writer Harold Brubaker at 215-854-4651 or email@example.com.