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Among oil companies Sunoco Inc. (NYSE: SUN) represents a riskier play because SUN meets its crude oil requirement via purchases from third parties, as opposed to company owned operations.A major strength is Sunoco's strong presence in the U.S.'s East Coast and Midwest markets, which provides considerable earnings stability. However, analysts' 2007-2008 projections for Sunoco's gasoline and petrochemical production are not outstanding. Further, look for refinery maintenance and repairs to hurt refinery production somewhat in 2007, but full refinery production should return in 2008. Sunoco has also been hindered by an emphasis on light sweet crude, which has restricted its ability to take advantage of larger refining margins for sour crude.
The big question is, why is Sunoco worth an investor's attention? Answer: Analysts could be a tad low regarding revenue growth for 2008, particularly given crude oil's persistently high price. Oil, which closed Friday around $89 per barrel, is likely to remain above $70 per barrel for the foreseeable future, and if $100 per barrel is in oil's near future, those 2008 revenue estimates for SUN will prove to be conservative. Further, SUN, which closed Friday at $71.10, has a PE ratio of about 8 -- which makes it a very cheap stock.
Sunoco's chart reflects Wall Street's belief that 2007-2008 revenue growth will be modest. The stock has drifted sideways for about two months, it's below its 50-day moving average, and it's not technically unreasonable to suggest that the stock could re-visit the $62-$64 range.
Stock Analysis: Sunoco is a moderate-risk stock not suitable for low-risk investors. Moderate/high risk investors seeking an oil stock capable of a large return on equity (50% or greater) should consider purchasing Sunoco's shares at these levels. Consider a stop loss level of $49. A safer play would be to wait to see if SUN drifts back below $65 before purchasing shares, but if crude oil continues to rise, that opportunity may not present itself.
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