UPDATE: Sunoco To Expand US Coking Business

Sunoco Inc. (SUN) top executives announced plans Thursday to expand the company's U.S. coking operations and is in early discussions to expand overseas.

Sunoco's coke business earned $37 million in the first quarter. Across its operations, the company posted a loss of 53 cents a share during the first quarter, swinging from a profit of 10 cents the year before. Analysts surveyed by Thomson Reuters expected a loss of 10 cents.

The Philadelphia-based company is expanding coking operations as its core oil-refining business continues to struggle. Oil refiners in the U.S. saw highly profitable operations bleed money over the past year as oil prices rebounded while demand for gasoline, distillates and other products fell sharply. The poor economic environment forced Sunoco to shut an East Coast refinery and sell one in Oklahoma last year.

During a conference call late Thursday afternoon, top Sunoco executives identified the coal business as an attractive growth area due to an ongoing effort to cut overhead costs and improve returns. They are eyeing opportunities to expand abroad, but those plans are still in early stages.

"We're starting to have conversations in select places around the world outside of the U.S. about opportunities," said Brian P. MacDonald, Sunoco's chief financial officer. "There's really nothing specific to talk about, but we see some good opportunities there and we see some good interest from steelmakers."

Sunoco maintained its net income guidance for 2010 at $125 million to $140 million for the coking business, with the expectation that improving coal prices and lower costs will help offset the negative impact of the various operational challenges in the coal business.

The coking facility in Granite City, Ill., has been in start-up mode through the first quarter, but "we continue to work through some challenges within the operations that have caused our ramp-up to be slower than planned," said Brian P. MacDonald, Sunoco's chief financial officer, in a conference call Thursday.

Sunoco said it would expand production of high-quality coal at its Jewell mining facility in Virginia by 40% a year, to an annualized rate of 1.755 million tons by late 2012. This project will cost $25 million over the next four years. "We would initiate the project in the current quarter, starting with the training of new miners," MacDonald said. Jewell will start to see higher output next January, but the company has not decided whether the additional coal will be sold to third parties or used at the company's coke plants.

MacDonald said the expansion project to have a "slightly negative impact" on 2010 and 2011 income.

Sunoco also began construction of a coke facility in Middletown, Ohio, in early April and is expected to begin production in the second half of 2011. Sunoco has a deal to provide coke and power to AK Steel Holding Corp. (AKS) over a 20-year period.

Executives did not give price projections during the conference call but indicated that every $25 a ton change in coal prices would have a $40-million impact on earnings before interest, taxes, depreciation and amortization; as well as a $20 million-$25 million impact on net income.

Shares were up 0.3% at $31.50 recently in electronic trading. The stock is up 18% this year.

-Naureen S. Malik, Dow Jones Newswires; 212-416-4210; naureen.malik@dowjones.com

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