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Gold/Mining/Energy : Sunoco - SUN - The Best Oil Company -- Ignore unavailable to you. Want to Upgrade?

To: Dennis Roth who wrote (27)	5/9/2008 7:35:07 AM
From: Dennis Roth	Respond to of 29

Sunoco, Inc. (SUN): Downgrading to Neutral in order to reduce refining exposure - Goldman Sachs - May 06, 2008 What happened We are removing Sunoco shares from the Americas Buy List and now rate it Neutral, as we are looking to reduce our exposure to refining-leveraged companies and increase our exposure to crude oil stocks. Among refiners, we prefer Valero Energy and Frontier Oil, both of which have superior exposure to widening light-heavy crude oil spreads. In a related note, we have upgraded shares of Hess to Buy in place of Sunoco to gain crude oil leverage. Since being added to the Buy List on August 9, 2007, Sunoco shares are –27%, badly lagging the XOI (+14%) and the S&P 500 (-3%). Over the LTM, SUN is -40%, versus the XOI +16% and the S&P 500 -6%. Current view Our refining sector call has been wrong, with the group down 25% since our December 13, 2007 upgrade versus a 5% decline in the S&P 500. As noted above, our recommendation on Sunoco has similarly not fared well. We believe we mis-anlayzed the end game on US gasoline markets within our long-standing “super-spike” framework. It has been our view that gasoline prices would continue to rise until demand turned negative, with a particular emphasis on the US. That part has turned out correct. What we got wrong was the view that higher gasoline prices would be a function of higher crude oil prices and higher gasoline cracks, given the strong historic, positive correlation between the two. For reasons we discuss in more detail in our just published report, “$100 oil reality, part 2,” crude oil prices have stayed stronger-than-expected at a time of gasoline crack spread weakness. While we still expect some recovery in gasoline cracks, we have lowered our expectations relative to our original call. We continue to see value in the refining sector, but at this time prefer to focus on Valero and Frontier, which have superior leverage to widening light-heavy spreads. Sunoco remains very inexpensive, especially on a sum-of-the-parts basis. However, we can no longer justify having three of our five Buys in the refining sector. We are lowering our 12-month target price (based on asset value, P/E and cash flow valuation analyses; key risk is sustained lower refining margins) for SUN to $53 from $70 previously.