6 Fuel Takeaways From Sunoco LP
By Samantha Oller on Feb. 24, 2017DALLAS -- Sunoco LP’s 2016 buying spree is showing up in its fuel performance for the year and its final quarter.
In a fourth-quarter 2016 earnings call, CEO Bob Owens pointed to several of the Dallas-based partnership’s acquisitions for improved gallon figures. These include:
- Denny Oil Co. Inc., which brought six c-stores and fuel supply contracts for 127 wholesale dealers and 500 commercial customers in Eastern Texas and Louisiana.
- The fuels business of Emerge Energy Services LP, which included two transmix processing plants and refined product terminals in Alabama and Texas.
- The retail and wholesale assets of Kolkhorst Petroleum Inc. in Texas and retail assets from Valentine Stores Inc. in New York, which brought 32 c-stores and 34 dealer supply accounts.
These four transactions combined added more than 300 million gallons to the partnership’s annual fuel volumes, Owens said. For more on Sunoco LP’s higher volumes and other fuel highlights from the fourth-quarter call, read on.
Fuel volumes
For full-year 2016, retail gallons rose 6.6%, or 29 million gallons, to hit 2.5 billion gallons, thanks to the 2016 acquisitions and new-to-the-industry sites. In fourth-quarter 2016, retail gallons increased 1% to 626 million gallons.
Wholesale gallons were up 9.5% to 1.4 billion gallons thanks to the acquisitions and growth in unbranded fuel sales.
Same-store gallons, however, fell 1.9%, weighed down by poor sales at Sunoco LP’s sites in the economically depressed, oil-producing Texas markets. Sunoco LP has about 140 stores in the oil patch, with 75% in the Permian Basin and the rest in the Eagle Ford Shale region. In these areas alone, same-store gallons fell 3.9%.
Excluding the oil-patch sites, same-store gallons fell 1.7%.
State of the oil patch
Sunoco LP is seeing “some improvement” in the oil-producing regions of its footprint, said Owens, with sites performing better than in recent, previous quarters where same-store margins and gallons were off in the low to mid-teens.
He noted that although rig counts are up greatly, they are still down 60% from their peak, “when we had literally lines out the door, guys in coveralls and with muddy boots fueling up white pickup trucks or smaller commercial vehicles.”
Also, producers have become leaner from an operational perspective.
“The guys that are drilling are doing it with lots more automation and a lot fewer employees,” said Owens. “That's the reality of what we're dealing with.”
Meanwhile, Sunoco sites near the Texas/Mexico border are also underperforming. Owens pointed to a weak peso-to-dollar exchange rate, “which was exacerbated by the November election results and subsequent rhetoric regarding Mexico and immigration.”
Wholesale gallons
Sunoco LP’s wholesale segment saw net income of $61.4 million in fourth-quarter 2016, compared to a $10.2 million loss in fourth-quarter 2015.
This is thanks to its 2016 acquisitions, as well as growth in unbranded sales. Wholesale gallons rose 9.5% to 1.4 billion gallons, picking up 9 cents per gallon (CPG) in margin, vs. 9.6 CPG the year prior.
The Emerge acquisition in particular already shows promise. The purchase included two hydrotreaters, which remove sulfur from diesel, enabling Sunoco LP to produce ultra-low-sulfur diesel (ULSD). This should help further stabilize and grow earnings over time, said Owens.
Fuel margins
For full-year 2016, Sunoco LP’s retail fuel margin dipped 2.4 CPG to 24 CPG. A rebound in oil prices during late fourth-quarter 2016 provided the pressure.
Fuel margin for fourth-quarter 2016 slipped to 14.3 CPG on a weighted-average basis, a 1.4-CPG drop from fourth-quarter 2015. Retail margins were off 2.1 CPG to fall to 25.7 CPG, while wholesale margins fell 0.6 CPG to reach 9 CPG.
RINs
In a recent earnings call, Murphy USA CEO Andrew Clyde commented on the future of the Renewable Fuel Standard (RFS), given speculation that the point of obligation under the program might shift downstream from refiners and importers to rack blenders. Many merchant refiners have pushed for this change, arguing that nonobligated parties such as retailers are profiting from selling Renewable Identification Numbers (RINs), the price of which escalated in 2016 to multiyear highs.
“Our view is that the EPA has a very solid program,” said Clyde at the time. “The refiners are not being harmed because [the RIN price is] built into the spot price of gasoline and therefore, their refining margins.”
When asked by an analyst about Clyde’s comments, Owens agreed with Murphy USA’s CEO. “As somebody who has dealt with RINs as a refiner and now as a marketer, I think when you look at the cracks, you see RINs reflected,” he said. “Surprisingly or not surprising to me, our retail margins have stayed within a very tight band. So we're not in favor of changing who the obligated party is.”
While acknowledging that the RIN market “isn't 100% efficient,” he added, “I'm happy that we're a blender and a grader of RINs.”
Demand outlook
Sunoco LP’s view of fuel demand: “essentially flat.”
Positive factors such as an improved economy and higher employment have fueled growth in vehicle miles driven, Owens said. Meanwhile, lower gasoline prices have encouraged consumers to buy more SUVs and light trucks.
“But that's all largely offset by CAFE standards and the fact that an SUV may use more gasoline than a Prius, but an SUV today gets a lot better mileage than an SUV did five or 10 years ago,” said Owens. “All [of] those factors coupled with the length of time that people own their vehicles—currently 11 to 12 years [on] average—argue for pretty good stability.”
And 2017 is off to a slow start in terms of fuel demand, especially in Sunoco LP’s Northeast markets. He credited poor weather and a slowdown in the region’s economic activity for much of the flagging demand.