Sunoco equity purchased on the strength of the first statement could be on shaky ground.
Diesel demand has been middling for the last two years and shows little signs of a recovery in the short or long term. Diesel demand for September 2009 was 3.66 MMbbl/d, just 2.1% lower than the 3.73 MMbbl/d value for September 2007, a time when exports, rural driving for leisure and urban driving for industry were booming. If anything, diesel demand has held up well in comparison to industrial production, but expecting a recovery when we’re practically already at 2007 levels is myopically optimistic.
According to our analysis here at The Schork Report, the second argument, that Sunoco might be a good buy due to its non-refining business holds more water. In the short term, the 321 crack margin (the so-called “refiner’s crack”) has a third quarter average (2003 to 2007) of $6.99, and as of the end of last week it was at $5.31. That means we could see further strength for refiners as units enter turnaround season, especially if analyst predictions for a harsh winter hold true. Sunoco’s prices regressed on the crack margin alone would imply a stock price of $33.63, slightly above last week’s closing price. Thus, with Sunoco trading down below $30 prior to the Morgan report, it appeared the stock was undervalued, relative to the crack market.
However, the market is now in the process of arbing that differential out. Anyway, indefinitely idling its NJ refinery will also lead to $250 million in savings for the year. It is no coincidence that Valero Energy, whose price rose 7% on Friday, also announced plans to lay off 100 workers, or 20% of the workforce, at its Paulsboro refinery in NJ.
Stephen Schork is the Editor of, "The Schork Report"and has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.