Sunoco idling Eagle Point refinery, slashing dividend in half

In a major attempt to cope with slumping global demand for fuel and a dismal profit outlook, Sunoco Inc. said yesterday it was indefinitely idling its Eagle Point oil refinery in Gloucester County and slashing its dividend in half.

The Eagle Point shutdown, which could turn out to be permanent if market conditions fail to improve, is scheduled to start today and is expected to take four to six weeks to complete. About 400 employees will be furloughed, with the option of taking severance packages.

The 145,000-barrel-per-day refinery is on the Delaware River opposite South Philadelphia.

Sunoco chairman and chief executive Lynn Elsenhans said the company was taking the unusual step of idling the refinery because demand for diesel fuel and gasoline is down, while supplies are up, largely because of refinery expansions overseas.

"The challenging market that we see ourselves in in refined products today, we don't anticipate is going to turn around soon," Elsenhans said in an interview at company headquarters in Center City.

Sunoco is far from alone in its woes. The entire refining sector has swooned after a run of record profits in the middle of this decade. Even as the price of a barrel of crude oil has more than doubled since December - to $71.39 - overcapacity in refining has kept a tight squeeze on producers such as Sunoco that don't pump their own crude oil.

Sunoco announced in August that it had lost $77 million in its refining operations during the second quarter. Since then conditions have only gotten worse, said Elsenhans, who joined Sunoco 13 months ago and has been aggressively reducing the company's costs.

She said that Eagle Point's production would be transferred to Sunoco's refineries in Philadelphia and Marcus Hook, boosting the capacity utilization at those plants into the mid-90 percent range.

The consolidation of production on the western side of the Delaware River would allow those two refineries, which are connected by a 19-mile pipeline, to operate at or near break even on a cash-flow basis under current market conditions.

The Eagle Point refinery, which was built in 1949 by Texaco and bought by Sunoco for $111 million in 2004, was chosen for idling because it is less connected to the system that supplies Sunoco gas stations, Elsenhans said. The decision had nothing to do with the fact that Eagle Point is the only Sunoco refinery where hourly employees are nonunion, Elsenhans said.

The Eagle Point refinery faces a tough road back to production.

"We would need to see that there would be a sustained recovery in refining margins," before the refinery would be restarted, Elsenhans told analysts on a conference call yesterday after the stock market closed.

In the meantime, Sunoco is at the beginning stages of considering uses for the Eagle Point facility other than petroleum refining.

"One of the options we want to explore is whether we can repurpose the facility to be a biorefining facility," Elsenhans said. Possible products could be biobutenol or vegetable-based oils, she said.

This year Sunoco took a solid step into the world of biofuels when it bought a New York ethanol plant out of bankruptcy for $8.5 million.

That was a rare expansive move for Sunoco, which has mostly been shrinking. In March, the company cut a fifth of its salaried workforce as part of a plan to save $300 million in costs annually.

The company also agreed to sell its Tulsa, Okla., oil refinery for $64 million. Last month it sold its home-heating-oil unit for $82.5 million and received bids for its large chemicals business.

The idling of Eagle Point is expected to save $250 million a year. Pretax charges are expected to be $475 million to $550 million, most of which will be recorded in the quarter that ended Sept. 30.

The dividend cut, which will take effect in the first quarter of 2010, will save $70 million in cash a year.

Sunoco's shares closed yesterday at $27.89, down 18 cents.