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Sunoco Downgraded

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We are downgrading Sunoco Inc. (SUN - Free Report) shares to Underperform from Neutral, reflecting the bearish refining margin outlook. 

Weak demand for refined products in the global downturn and increased capacity has squeezed margins throughout the industry. Rising crude oil prices have added to Sunoco’s miseries by increasing the cost of production. With utilization rates remaining at historically low levels, we see a fairly unfavorable macro backdrop for independent refiners over the coming 6 - 12 months. Sunoco’s lack of geographic diversification and refining flexibility has also become a major liability, in our view. 

Sunoco has announced certain strategic actions to improve the company’s performance and competitiveness in a cost-effective manner. These include the closure of the previously-idled Eagle Point (New Jersey) refinery, a definitive agreement to sell the polypropylene business and cutting its dividend. Early last year, the company sold its Tulsa refinery and Retail Home Heating Oil business. 

These liquidity enhancements (expected to save more than $300 annually) will ensure Sunoco’s survival during the downturn, but until there is a more visible refining margin improvement trend, we little reason for investors to own the stock. As has been the case during the last few quarters, non-refining profits are likely to be dwarfed by losses in the main (refining) business. 

Given these headwinds, we expect Sunoco shares to be under pressure in the near future. Philadelphia, Pennsylvania-based Sunoco is a leading independent refiner and marketer of petroleum products. The company is also a major chemicals manufacturer and has interests in logistics and cokemaking facilities. Its operations include three refineries having a combined capacity of 675,000 barrels per day.

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