Sunoco Inc.: An independent refiner worth considering

Posted Apr 16th 2007 9:30AM by Hilary Kramer
Filed under: Hilary On Stocks

If you live in the Northeast, like me, or in the Midwest, no doubt you're familiar with Sunoco Inc. (NYSE: SUN). You can't take a road trip without stopping off the highway for gas, and you can't stop off the highway for gas without having to choose between Mobil on one side of the street, and very likely Sunoco on the other. Oftentimes, I find myself choosing Sunoco simply because its gas is sometimes a penny or two cheaper. And like Mobil, with its Mobil Marts, Sunoco has a perfectly decent retail shop with snacks, coffee and a restroom.

How it can be a bit cheaper is one of the reasons I like Sunoco. The second largest independent refiner in the U.S., it has tried to stay above the challenges of being independent in a cyclical and volatile oil and gas industry by centralizing its geography -- sticking to the Northeastern and Midwestern U.S.. By keeping its operations close together, it significantly reduces its transportation costs, and by offering its own products through retail outlets, it is able to keep costs competitive.

No question, Sunoco faces many difficulties. For one, it refines light sweet crude, which is cheaper for it to produce, but more expensive than buying the heavy sour crude. And that's where the money is being made due to heavy discounts. But while Sunoco can't expand its current infrastructure to accommodate the heavy sour, it is able to retrofit its existing refineries to refine more of it.

Sunoco also operates in a market that is constantly shifting according to the price of oil. I believe that oil is rising, and it's only a matter of time before we see $78 per barrel again. As an independent, it is harder for it to adjust to the swings in prices as some of the larger refiners. So far, however, it has managed to stay competitive by dint of its geographical strategy.

Also, it has been repurchasing outstanding shares over the last several years, increasing shareholders' stock values. Additionally, it has taken smart measures to put on hold some of its long-lead time capital projects that have grown too expensive. Another bonus? It also pays a better dividend than competitor independent refiners, and I love a good dividend.

Type of stock: The second largest independent oil refiner in the U.S., primarily refining light sweet, over heavy crude oil, Sunoco keeps costs lower by keeping its operations close together geographically.

Price target: Currently trading at $74.75, I think this stock is a bit expensive. If it drops to the $70 level where it was at the beginning of this year, I'd pick it up and sell when it hits near $80.

Hilary Kramer is a financial editor and money coach for AOL and an authority on investing. Visit her at www.hilarykramer.com.

Tags: SUN, sunoco