(SUN) Sunoco Spreads Retail Network

In an attempt to expand its retail web, Sunoco Inc. (SUN) added 13 sites of its namesake brand in Birmingham, Alabama. The expansion was done under the terms of an agreement entered into with Quality Petroleum of Alabama and Chattahoochee Oil, a distributor of petroleum products.

The existing set-up of Sunoco retail sites consist of more than 4,900 stores selling transportation fuels and convenience items. Constructions of the new outlets are underway and will be made part of the Sunoco brand by the end of the third quarter.

Management remains highly upbeat about this development and noted that the new stores will widen Sunoco’s horizons. The company is also tying up with various distributors that will likely strengthen its foothold in Midwest and other Southeastern states.

Sunoco has embarked upon the strategy to make additions to its store base from early 2010 and has established more than 250 new retail locations till date. Last December, the company signed an agreement with Pennsylvania-based Lehigh Gas Corporation to acquire 25 retail assets in Buffalo, Syracuse, Albany and Rochester markets of central and northern New York.

Headquartered in Philadelphia, Sunoco is a leading independent refiner and marketer of petroleum products as well as a manufacturer of chemicals. The company also has interests in logistics and cokemaking facilities.

However, we believe that Sunoco’s near-term growth prospects remain clouded due to the supply-demand imbalance of refining products. Moreover, the company’s successful restructuring initiatives have been overshadowed by operational reliability issues and increased unscheduled downtime. We expect these issues to continue for some time, creating pressure on stock performance.

Taking into account these factors, we expect Sunoco shares to perform below the market level over the coming months and maintain our long-term Underperform rating on the stock.

Sunoco, which enjoys 31% interest in Sunoco Logistics Partners, L.P. (SXL), currently retains a Zacks #4 Rank (short-term Sell recommendation).

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