Following Sunoco Inc’s (SUN) announcement to exit the refining business, we have upgraded the Philadelphia, Pennsylvania-based downstream operator’s shares to Neutral from Underperform.
Last week, Sunoco came out with plans to get rid of its East Coast-based facilities that have been performing poorly during the last few years, thereby removing a major overhang on the stock. The Philadelphia and Marcus Hook refineries’ profitability have been hampered by higher crude prices, while their Mid-Continent competitors continue to benefit from the lower oil prices caused by the crude glut in Cushing. (Read our full coverage on Sunoco’s planned refinery shutdowns: Sunoco to Let Go Refining Units)
We remain positive on the outlook for the new Sunoco – without refining – as it holds the promise of unlocking significant value from its non-refining businesses apart from providing more stable revenue streams.
In particular, Sunoco’s logistics business – conducted through Sunoco Logistics Partners, L.P. (SXL) – offers a fairly stable source of earnings and cash flows from its growing asset base. This segment, which operates Sunoco’s substantial refined product and crude oil pipeline and terminal assets, is well positioned to benefit from the import-oriented East Coast, providing fee-based revenues under term contracts.
We are also bullish on Sunoco’s retail marketing segment – with 4,900 gasoline fueling stations across the East Coast and Midwest – that gives superior return and holds attractive growth prospects.
Overall, we believe the new-look Sunoco will offer more stable income, robust profitability and growth potential, which should inspire confidence among investors to hold Sunoco stock.
While being incrementally more positive on the company, we believe the realignment will take some time to bear results. As such, we expect Sunoco’s growth potential to be restrained with little room for meaningful upside from current levels. Our new long-term Neutral recommendation is supported by a Zacks #3 Rank (short-term Hold rating).