Ahead of the Bell: 2 analysts downgrade Sunoco on margins
NEW YORK—Two analysts downgraded Sunoco Inc. Tuesday and said the refiner's margins will likely continued to be pressured as crude oil prices continue their upward march.
JPMorgan analyst Michael LaMotte cut his rating to "Neutral" from "Underweight" and said the market fundamentals for refiners may not improve over the next 12 to 18 months.
"We believe the challenging margin environment is likely to pressure the company's margins disproportionately due to its leverage to sweet crude, East Coast gasoline and secondary products," LaMotte said in a note to clients.
He slashed his 2008 earnings estimates to $3.83 per share from $6.34 per share. Analysts polled by Thomson Financial expect, on average, earnings of $4.75 for the year.
Crude oil prices have rallied in recent months, and approached the $120 per barrel threshold in Monday trading.
Philadelphia-based Sunoco "faces an environment of increasingly tight supplies of light sweet crude and weak gasoline demand" and its "inability to process discounted feedstock, such as heavy/sour crude oil, is a competitive disadvantage, especially in an environment where product prices are not keeping up with crude price moves," Lamotte said.
Goldman Sachs analyst Arjun N. Murti removed Sunoco from the Americas Buy List, a group of preferred stocks, and cut his rating to "Neutral" from "Buy."
In a note to clients in late 2007, Murti recommended the refining sector to investors, a call that was "wrong," he said, because the sector's shares have fallen 25 percent since then, compared to a 5 percent drop in the S&P 500.
Murti had expected that higher gas prices would be a function of higher crude oil prices and cracks, or the difference between what refiners pay for crude and get for the gasoline they make.
While gasoline cracks are likely to still improve, Murti cut his expectations for Sunoco and lowered his price target to $53 from $70.
Shares fell $1.22, or 2.6 percent, to $46.58 in premarket trading Tuesday.
