Sunoco 2008 Annual Report Download - page 39

Overview
Historically, Sunoco’s profitability has primarily been determined by refined product and chemical margins
and the reliability and efficiency of its operations. The volatility of crude oil, refined product and chemical prices
and the overall supply/demand balance for these commodities have had, and should continue to have, a
significant impact on margins and the financial results of the Company. Sunoco’s profitability has been
increasingly impacted by the growth in the level of earnings in its cokemaking operations.
Throughout most of 2006 and 2007, refined product margins in Sunoco’s principal refining centers in the
Northeast and Midwest were very strong. Such margins benefited from stringent fuel specifications related to
sulfur reductions in gasoline and diesel products, strong premiums for ethanol-blended gasoline, generally tight
industry refined product inventory levels on a days-supply basis and strong global refined product demand
coupled with refinery maintenance/capital improvement downtime, which led to reductions in spare industry
refining capacity. However, refined product margins, particularly for gasoline, declined significantly in the first
half of 2008 in response to record high crude oil prices and softening global demand, then strengthened in the
second half of 2008 due to supply disruptions in the Gulf Coast attributable to Hurricanes Gustav and Ike and
declining crude oil prices. Chemical margins were weak during most of the 2006-2008 period in response to
significantly higher feedstock costs and softening demand. In 2008, cokemaking profitability increased
significantly primarily in response to increased price realizations from coal and coke production at the
Company’s Jewell operations.
Sunoco expects that refined product margins will continue to be positive, although at much lower levels than
the prior three years as a weakening global economy and lower global demand should continue to place pressure
on refined product margins, particularly for gasoline. However, the completion of major capital projects in 2007
has significantly enhanced the earnings potential and flexibility of Sunoco’s refining assets and should continue
to mitigate the adverse impact of market declines. The Company believes the profitability of the Chemicals
business will continue to be challenged in 2009 due to the weakening economy causing ongoing weakness in
product demand. The absolute level of refined product and chemical margins is difficult to predict as they are
influenced by extremely volatile factors in the global marketplace, including the absolute level of crude oil and
other feedstock prices, the effects of weather conditions on product supply and demand and the impact of a
weakening global economy. Cokemaking profitability is expected to continue to increase as various growth
projects in the Company’s coke business come on stream, although Coke segment profitability will be impacted
by volatility of coal prices on the Jewell coal and cokemaking operations.
The Company’s future operating results and capital spending plans will also be impacted by environmental
matters (see “Environmental Matters” below).
Strategic Actions
Sunoco is committed to improving its performance and enhancing its shareholder value while, at the same
time, maintaining its financial strength and flexibility by striving to:
• Deliver excellence in health, safety and environmental performance;
• Increase reliability and realize additional operational improvements of Company assets in each of its
businesses;
• Reduce expenses;
• Efficiently manage capital spending to minimize outlays during periods of weak profitability;
• Diversify, upgrade and grow the Company’s asset base through strategic acquisitions and investments;
• Divest assets that do not meet the Company’s return-on-investment criteria; and
• Return cash to the Company’s shareholders through the payment of cash dividends.
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