PhillyDeals: Sunoco's demise a 'Gothic tale' 100 years in the making

Peter Waitneight took a plum job at Sunoco Inc.'s old headquarters, 1608 Walnut St., in 1966. His Princeton and Wharton classmates congratulated him: Working at the Philadelphia oil giant "meant a job for life."

So the "virtual liquidation" of Sunoco - the closing of its historic Marcus Hook refinery, and the planned sale or shutdown of the Philadelphia oil complex it assembled from departed firms - has been especially sad, said Waitneight, Sunoco's ex-treasurer. But he can't say he didn't see it coming: "This is a Gothic tale that spans more than 100 years."

Sunoco's Pew Family founders were engineers, chemists, and real estate men, he said: "they were not oil risk-takers. They were not wildcatters."

They were conservative, Christian, nonconfrontational. The company lived, and faded, Waitneight said, by that same DNA.

The boss when he started was Robert G. Dunlop, a Wharton School valedictorian "from Drexel Hill, in the orthodox Pew format. He had been the controller," narrow preparation for an oil company president. Hired bosses and outside directors "were dignified people," but avoided challenging the Pews on the board. Before air-conditioning, staff wore suitcoats through the muggy Philly summer, so "J. Howard Pew wouldn't come downstairs and see you looking a shambles."

But with oil below $3 a barrel and surging gasoline demand, Sunoco was rich and "overstaffed" with new Harvard and Wharton M.B.A.s. It produced maybe half its own oil and bought the rest from outsiders, not that it was a priority: "They would pick one of the less effective Pews or another weak executive and send him to Dallas and say, 'See what you can find.' "

All that ended with the Arab oil embargo in retaliation for U.S. support of Israel in 1973. "Crude went to $15 a barrel overnight." Profits collapsed.

By then, Sunoco's boss was Robert McClements, a gifted but constitutionally skeptical engineer. McClements looked past the gas lines and saw that oil from new sources would break the world cartel - then jumped to a premature conclusion, Waitneight said: "Who needs crude? We'll buy it at the market. We'll spin off that whole Dallas mess." And he sold Sunoco's oil-exploration arm, and with it the company's future.

As McClements broke Sunoco into pieces, he shocked Waitneight by declining standard antitakeover protections for the Sun spin-offs. "I want these to disappear as soon as possible," was the message, Waitneight said. "All we want to do is cash out," while keeping the refineries.

Soon, oil-refining margins "were all we had left." The strategy had clear risks: When rising prices squeezed margins, the company would be tempted to put off improvements. Aging refineries would, in time, become unprofitable. But "nobody articulated this."

Waitneight was out in the early stages of the cost-cutting of the 1990s. Under chief executive officer John Drosdick, earnings and share prices at first rose. But higher oil prices in the mid-2000s wrecked profits. That brought in Lynn Elsenhans and the sales and shutdowns that leave Sunoco with little more than its logistics division and a chain of gas station/mini-markets.

I thought Waitneight was telling a classic tale of Philadelphia shortsightedness. Not quite, he said:

Sure, Sunoco's share price trailed its rivals', excepting the early Drosdick years. But look at all the prosperous businesses Sunoco spun off: its oil-exploration arm, sold to Kerr-McGee Corp., later part of Anadarko Petroleum Corp.; Suncor Energy Inc., which Waitneight said Sunoco sold because it didn't want a Texas-style confrontation with Canada regulators, is thriving in the tar sands; Wayne-based SunGard Data Systems Inc., the data-services giant, fetched investors $9 billion in its record-setting 2005 sale; and more.

"It's not that Sunoco was stolen," Waitneight concluded. Investors, and Philadelphia, "did benefit in some ways." How much, he said, would take "careful measurement. We could write a book."

He said he had already shopped it to a scholar at the University of Pennsylvania but was told the topic was sensitive there. Key Penn programs rely on that other Sunoco legacy, the $4.7 billion-asset Pew Charitable Trusts.