In my last post I took a look at the ‘rumor mill’, but sometimes you just don’t seem them coming (even if they make sense). In mid-June this year, Sunoco Inc (SUN) announced its plans to spin-off SunCoke Energy in the first half of 2011. Sunoco is principally a petroleum refiner and marketer and chemicals manufacturer, but also has logistics and coke making businesses. According to the company, the plan is to create a “leading, high-quality metallurgical coke manufacturer with operations in the U.S. and abroad, and a streamlined fuels business focused on Refining, Supply, Logistics and Retail Marketing that is better positioned to become the premier provider of transportation fuels in its markets.”
SunCoke makes high-quality metallurgical-grade coke for major steel manufacturers in the United States and Brazil using its proprietary technology (as an FYI – coke is a principal raw material in steel making). The company has facilities in the U.S. (located in Virginia, Indiana, Ohio and Illinois) and operates/owns an equity stake in a Brazilian facility. Currently, in the US the company has the capacity to manufacture approximately 3.67 million tons, with an additional 1.7 million tons of metallurgical coke annually from their Brazilian operations (that is over 5 million tons total for those who can’t add). The company also makes use of co-generation facilities (combined heat & power systems) which recycle waste heat into energy which then can be sold (or be used to reduce operating costs). The company boasts some of the largest steel makers in the world as customers such as AK Steel, US Steel and ArcelorMittal.
The reason for the split is simple according to Lynn Elsenhans, chairman and CEO of Sunoco, who said that:
“The fuels and coke units are distinct businesses with different business models, different sets of customers and no significant integration or synergies…We believe that, through a separation from Sunoco and with a management team solely focused on pursuing opportunities, SunCoke Energy will be better positioned to serve its customers who are the world’s leading steel manufacturers. The separation will also provide SunCoke Energy independent access to capital markets to finance its growth and enhance its scale to take advantage of domestic and international growth opportunities.”
Nothing too insightful from Ms. Elsenhans aside from the usual explanations. She may have a point about the company’s potential though. Here is a look at the recent financial performance of Sunoco’s Coke segment pulled out from the parent’s financial statements:
| Sunoco Inc – Coke Segment Statistics |
| ($ in mm) |
2004 |
2005 |
2006 |
2007 |
2008 |
2009 |
Q1 2010 |
Q2 2010 |
| Revenue |
$272 |
$420 |
$485 |
$516 |
$838 |
$1,124 |
$329 |
$350 |
| EBT |
58 |
69 |
52 |
14 |
135 |
193 |
51 |
56 |
| Tax Expense |
18 |
21 |
2 |
(15) |
30 |
13 |
|
|
| EAT |
- |
- |
- |
$29 |
$105 |
$180 |
$37 |
$41 |
|
|
|
|
|
|
|
|
|
| Assets |
$374 |
$417 |
$483 |
$706 |
$1,039 |
$1,284 |
|
|
| EBITDA |
|
|
|
$34 |
$160 |
$226 |
|
|
| D&A |
$13 |
$16 |
$18 |
$20 |
$25 |
$33 |
|
|
| CapEx |
($135) |
($32) |
($14) |
($182) |
($312) |
($229) |
|
|
|
|
|
|
|
|
|
|
|
| EBITDA Margin |
|
|
|
6.6% |
19.1% |
20.1% |
|
|
| Net Margin |
|
|
|
5.6% |
12.5% |
16.0% |
11.2% |
11.7% |
Performance appears to be improving despite the difficult economy. Looking ahead though, results could end up being volatile depending on coal prices and global demand for steel. The company expects these positive trends to continue though and were rather bullish on the company’s operations during a presentation at a June 16th Analyst Day. Here is a slide from that presentation with some projections (it is worth taking a look at the entire presentation):
| SunCoke |
|
|
|
|
|
Proforma |
| Year: |
|
|
|
|
|
2012** |
| EBITDA, $MM |
|
|
|
|
|
315-355 |
| Less: Depreciation |
|
|
|
|
|
55 |
| Less: Income Tax |
|
|
|
|
|
101-116 |
| Plus: Tax Credits |
|
|
|
|
|
16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net Income |
|
|
|
|
|
175-200 |
Here is a look at the company’s production totals for the past few years…
| Production (Thousands of Tons): |
2007 |
2008 |
2009 |
| Coke: |
|
|
|
| United States |
2,469 |
2,626 |
2,868 |
| Brazil |
1,091 |
1,581 |
1,266 |
| Metallurgical Coal |
1,220 |
1,179 |
1,134 |
| Proven and Probable Metallurgical Coal Reserves |
|
|
|
| at December 31 (Millions of Tons) |
101 |
100 |
99 |
It appears as if there is still some excess capacity available in its current operations for growth. Additionally, the company is currently building a plant in Middletown, Ohio, that is slated to produce 550,000 tons of coke and 46 megawatts of electricity when fully operational in the second half of 2011. This is probably one of the reasons behind the enhanced results expected for 2012, so it will be imperative to monitor any delays or issues on that front. They also recently announced plans to increase production from its metallurgical coal mines from approximately 1.25 million tons annually to approximately 1.75 million tons annually. Expansion will ultimately drive growth and there is a lot of potential outside of the US.
Recently, Sunoco announced that Fritz Henderson will become Chairman and CEO of SunCoke Energy post-spinoff. It was an interesting choice considering the fact that Mr. Henderson’s background is mainly in the automotive sector. Fritz was at GM for over 25 years before becoming CEO at the beleaguered car company for a brief 9 month stint in 2009. His tenure was cut short though as many believed he was incapable of bringing about its turnaround fast enough. That is not exactly an encouraging sign, considering the people at GM probably know him better than anyone else. Good leadership is always critical to a company’s success, but it is especially important for a new company breaking out on its own.
At this stage, both the parent and spinoff look potentially interesting, but there are still many unanswered questions. We will continue to monitor the situation and provide updates when more information is available.
Disclosure: Author holds no positions in any of the stocks mentioned
