UPDATE 7-Sunoco to sell refinery business, keep retail
* Latest shake-up of U.S. refining sector
* Sunoco seeks to sell Philadelphia, Marcus Hook plants
* Plants to be idled in July 2012 if no deal completed
* Credit Suisse to assist in strategic review (Adds comments on Conoco in paragraphs 11, 12)
By Jeffrey Kerr and Janet McGurty
NEW YORK, Sept 6 (Reuters) - Sunoco Inc SUN.N plans to end nearly 120 years in the U.S. refining business, selling its two remaining plants as higher crude prices and slumping demand squeezed profits in the latest restructuring of the sector.
The Philadelphia-based company will remain a gasoline retailer through its 4,900 stations across the East Coast and Midwest, but will put its 335,000-barrels-per-day (bpd) Philadelphia refinery and 178,000-bpd Marcus Hook, Pennsylvania refinery on the block.
The move is the latest shift in the U.S. refining sector, which has seen a wave of companies disposing of refining assets, selling plants or mothballing them over the past two years as firms reorganize businesses to adjust to changing economics in oil product markets. [ID:nN1E7850V8]
U.S. refiners have seen profits squeezed by sluggish demand due to the weaker economy and strong crude oil prices. Sunoco Chief Executive Lynn Elsenhans said the refining segment operated at a loss in eight of the last 10 quarters.
"It is in the best interests of shareholders to exit this business and focus on our profitable retail and logistics businesses," Elsenhans said in a statement on Tuesday.
Sunoco's share price rose $1.92, or 5 percent, on the day to $38.03 after the news.
If the company is unable to strike a deal to sell the plants by July 2012, it plans to idle the two main processing units at the facilities.
One option if no buyers can be found is to turn the refineries into terminals. Marcus Hook offers the better site for a terminal facility as it has storage tanks for crude oil and refined products as well as caverns for natural gas liquids storage, Elsenhans said.
The Philadelphia refinery would likely be better used as an industrial site and could process ethane from Marcellus Shale natural gas into ethylene, Elsenhans said.
The 513,000 bpd of refining capacity Sunoco is selling represents a significant portion of East Coast capacity. The U.S. Energy Information Administration estimated East Coast refining capacity at 1.7 million bpd, of which 1.27 million bpd is operating capacity, in a report from early 2011.
Energy investment bank Simmons & Co said in a Tuesday note that ConocoPhillips (COP.N) may be the next to put East Coast refineries up for sale, although the company said it had no such plan.
Conoco owns the 238,000-bpd Bayway refinery in Linden, New Jersey, as well as the 185,000-bpd Trainer, Pennsylvania refinery. [ID:nN1E7851RU]
In addition to its gasoline stations, Sunoco plans on retaining its logistics business, which has refined product and oil pipelines as well as terminals and is operated by Sunoco Logistics Partners (SXL.N).
The company will hold a strategic review, assisted by Credit Suisse (CSGN.VX), to explore ways to use its "strong cash position and maximize the potential for its logistics and retail businesses".
Sunoco bought its first refinery in the 1890s as part of an early effort to diversify its oil production business.
Sunoco has had some initial interest from potential buyers, a company spokesman said, without elaborating further. Industry watchers said big refining players on the East Coast such as PBF and ConocoPhillips could be barred from purchasing due to concerns about market concentration.
"It would have to be private equity," said Mark Gilman of New York-based The Benchmark Company, echoing comments from other analysts.
PBF, which purchased two East Coast plants -- the idled Delaware City, Delaware refinery and the Paulsboro, New Jersey refinery -- in recent years, declined comment. ConocoPhillips also declined comment.
Norwegian integrated oil company Statoil, a supplier of crude to refiners in the region, also declined to comment.
EAST COAST WOES
While refiners in other parts of the United States have somewhat rebounded from paltry margins because they can process cheap, dirty crude or sit near growing U.S. supply, East Coast refineries have lagged.
Midwest refiners, for example, have seen robust margins for months because of close access to increased supply from U.S. and Canadian shale oil plays. But East Coast refiners largely rely on more expensive imports.
U.S. Northeast refining margins have averaged $8.59 per barrel so far this year, Credit Suisse said in a report, $3.84 per barrel higher than a year ago, but nowhere near the $26.18 per barrel margin seen in the Midwestern United States.
Sunoco's plants, which ran expensive, light, sweet crudes sourced from West Africa and other Atlantic Basin suppliers, also lack sophisticated coking capacity that would enable them profitably to run cheaper, heavy, sour crude, like refiners along the Gulf Coast.
"Sunoco has largely missed out on the strong recovery in refining profits over the last year because of its reliance on higher-cost waterborne feedstock and lack of Midcontinent refining capacity," Morningstar Equity Research said in a note.
In addition, East Coast plants are further from South American markets, which Gulf Coast refiners have been supplying in greater volumes as demand there grows.
Elsenhans said the strategic review will look at every aspect of the company and determine the best way to unlock value for shareholders, including governance, management, uses of cash and potential sales of other operating units.
"Everything is on the table," she said.
Sunoco expects a pretax non-cash charge of $1.9-$2.2 billion in the third quarter related to impairment of the plant and equipment in its refineries.
If the processing units are idled, additional pretax charges of up to $500 million may be incurred.
Sunoco has already completed the sale of its 170,000-bpd Toledo refinery in Ohio to PBF Holding for $400 million. In May, it sold a chemicals plant in Philadelphia to Honeywell International (HON.N) for about $85 million. [ID:nN02242802]
Sunoco also spun off its coal production unit SunCoke Energy (SXC.N). (Additional reporting by Krishna N Das and Antonita Madonna in Bangalore; Matt Daily, Selam Gebrekidan and Robert Gibbons in New York; and Erwin Seba in Houston; Editing by Andrea Evans and Matthew Robinson)