(SUN) Sunoco Analyst Maintains Underperform on Shares

We have maintained our Underperform recommendation on oil refiner and marketer Sunoco Inc (SUN). Lately, investors have been selling the stock for its weak fundamentals and tepid outlook. The disappointing first quarter results have added to this bearishness.

Sunoco, which competes in the Oil Refining and Marketing industry with firms like Valero Energy Corp. (VLO) and Tesoro Corp. (TSO), currently has a Zacks #4 Rank (Sell rating) for the short run. In recent times, a number of issues have stalled the company’s stock price.

Operational reliability problems and increased unscheduled downtime – that led to a dull first quarter in which the company lost $1.01 per share – have overshadowed its gains from successful restructuring initiatives over the last two years.

We expect these concerns to act as a drag on the company’s shares for some time to come. Rising crude oil prices have added to Sunoco’s miseries by increasing the cost of production.

Though Sunoco has settled its litigation with steel giant ArcelorMittal (MT) concerning coke pricing for its Jewell cokemaking facility, we are wary of the implications of the settlement. We believe this will not only lower Sunoco’s pre-tax earnings due to supply contract amendments but also delay the SunCoke separation transaction beyond the targeted completion date of the first half 2011.

The lack of geographic diversification and refining flexibility has also become major liabilities for Sunoco, in our view. Given these headwinds, we expect the company’s 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, of which roughly 75% is located in the Northeast and the rest in the Mid-Continent region. Sunoco’s retail marketing operations include more than 4,800 retail sites in 23 states, primarily in the East Coast and Midwest regions of the country.

ARCELOR MITTAL (MT): Free Stock Analysis Report

SUNOCO INC (SUN): Free Stock Analysis Report

TESORO CORP (TSO): Free Stock Analysis Report

VALERO ENERGY (VLO): Free Stock Analysis Report

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