Citigroup downgraded Sunoco (SUN) and Valero Energy (VLO) to hold from buy.
Analyst Doug Leggate says the downgrades reflect ongoing margin weakness and his view that second-half earnings per share may fall below consensus forecasts. While there's normally a fall in refining margins after the summer driving season, he thinks the decline this year could be exacerbated by a shift back to winter grade gasoline, which could alleviate much of the blending difficulties that supported margins during much of 2006. Leggate also notes that U.S. product inventory levels have recovered from recent lows.
The analyst cuts his 2006 earnings per share estimate for Valero from $9.05 to $8.83, and his $79 price target to $65. He also trimmed his Sunoco 2006 EPS forecast from $8.15 to $7.75, and $90 target to $81.