Valero, Sunoco Report Positive Third Quarters

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Valero, Sunoco Report Positive Third Quarters

PHILADELPHIA -- Sunoco's retail marketing business earned the company $77 million in the third quarter of 2006, a sharp increase compared to the $6 million earned for the same period in 2005. The jump is primarily due to increased gasoline margins, in addition to a rise in monthly diesel and gasoline sales through the company's owned or leased outlets, which were nearly 5 percent higher than the third quarter of 2005.

"While retail prices for gasoline declined from their early August high through the end of September by approximately 70 cents per gallon, average margins were strong," said John G. Drosdick, Sunoco chairman and CEO.

The company recorded a net income of $351 million for the third quarter of 2006, up from the $329 million reported for the same period in 2005. Income for Sunoco was $357 million for the third quarter, due to strong refining and supply margins.

"Continued strong refining and supply earnings and a record quarterly result from our retail marketing business led to an excellent quarter for the company," said Drosdick.

For the first nine months of 2006, Sunoco's net income totaled $856 million, compared to $687 million raised for the same period in 2005. The company's refining and supply operations earned $273 million for the quarter, with particularly high margins in the company's MidContinent Refining System, which averaged almost $15 per barrel. In the Northeast, margins on average totaled $8.35 a barrel, as wholesale gasoline margins slid downward and were somewhat compensated by value-added margins.

With the fourth quarter underway, Drosdick looks for more traditional margins. "With lower refining margins and high industry inventories entering the [fourth] quarter, we took the opportunity in October to complete refinery maintenance activity at several processing units in our Northeast system and at our Toledo refinery. The work … will reduce October net production by approximately three million barrels." He added "In retail marketing, retail gasoline price declines continued into October and margins have returned to more historical levels."

In other third quarter news, Valero Energy Corp. reported a record third quarter net income of $1.6 billion, or $2.55 per share, which compares to $862 million, or $1.47 per share, in the third quarter of 2005.

The third quarter 2006 results include a $132 million pre-tax gain, or $0.13 per share, on the sale of 41 percent of the company's ownership interest in Valero GP Holdings, LLC on July 19, 2006. The third quarter 2005 results include a $621 million pre-tax LIFO charge to cost of goods sold related to the difference between the fair market value recorded for the inventories acquired from Premcor Inc. on September 1, 2005 under purchase accounting and the amounts required to be recorded under the company's LIFO accounting policy. Excluding these special items, the company's third quarter 2006 net income was $1.5 billion, or $2.42 per share, compared to $1.3 billion, or $2.19 per share, in the third quarter of 2005, the company reported.

"We had the highest third quarter earnings in the company's history despite the drop in gasoline margins that began in early August," said Bill Klesse, CEO of Valero. "Throughout the third quarter, though, distillate margins and sour crude oil discounts were very favorable. The strong sour crude oil discounts, coupled with more reliable plant operations and outstanding U.S. marketing margins, allowed us to capture more of the margin as compared to last quarter."

He continued, "Gasoline margins in the third quarter were volatile, while distillate margins and feedstock discounts were much more stable. Gulf Coast conventional gasoline margins averaged $12 per barrel for the quarter and Gulf Coast off-road diesel margins averaged around $9 per barrel throughout the quarter. More importantly, Gulf Coast on-road diesel margins averaged almost $17 per barrel. Keep in mind that almost 75 percent of our distillate production is sold at premiums to off-road diesel or heating oil. We also benefited from favorable discounts for medium and heavy sour crude oil. Heavy sours, such as Maya, averaged nearly $15 per barrel throughout the third quarter."

For the nine months ending September 30, 2006, the company's reported net income was $4.3 billion, or $6.83 per share, which compares to $2.2 billion, or $3.96 per share, for the nine months ended September 30, 2005. Excluding the special items noted above, the company's net income for the nine months ended September 30, 2006 was $4.3 billion, or $6.70 per share, compared to $2.7 billion, or $4.71 per share, for the same period in 2005.

"So far in the fourth quarter, gasoline margins have recovered appreciably from September, while distillate margins and sour crude oil discounts have remained very good," said Klesse. "In October, Gulf Coast gasoline margins have averaged $4.45 per barrel and on-road diesel margins have averaged $13.10 per barrel. These are great margins for this time of year and are the result of two key factors. On the supply side, we believe that refinery maintenance in both the U.S. and Europe has substantially reduced utilization rates and led to lower domestic production and lower imports. Even more notable is that demand has continued to be very strong for gasoline and distillates, as consumers have benefited from falling retail pump prices and a growing economy."

"We continue to believe that the combination of slower than anticipated growth in global refining capacity, cleaner fuel specifications, and continued demand growth should keep the supply and demand balance for refined products tight. Our large, complex, and geographically diverse refining system positions us ideally to benefit from this environment, and we expect Valero to continue generating strong earnings and significant free cash flow," said Klesse.

In other Valero news, The U.S. Chemical Safety Board (CSB) requested the company improve its safety procedures after investigating the deaths of two of its contractors who were asphyxiated when retrieving a roll of duct tape that had fallen into a refinery reactor.

The accident occurred in November 2005 in its Delaware City, Del. refinery. At the time of the accident, there was almost no oxygen in the vessel, as it had been purged with nitrogen as part of routine maintenance. Although the maintenance contractors knew they were not to enter the reactor vessels, the warnings there were not sufficient, Reuters reported.

The CSB noted that a person entering such an environment could collapse into a coma in less than 40 seconds, and death would occur soon after. The victims decided to retrieve the tape themselves, rather than wait for the trained personnel to arrive and enter the vessel, the report stated.

CSB investigators concluded that one worker entered the vessel intentionally or fell in while trying to get the tape. An eyewitness saw the second worker enter the vessel to assist his colleague, Reuters reported. Rescue workers could not resuscitate the men despite their quick arrival.

A warning sign was posted at the entrance alerting the workers they needed a confined space permit to enter the unit. The CSB found that a warning sign on the low-oxygen had been placed after the workers' deaths, the report stated.

In an e-mailed statement to Rueters, Valero said that it has already implemented four of the safety recommendations and that it was working to further improve safety at the Delaware City refinery, which it acquired in September 2005 through its merger with Premcor.