Why Sunoco Is Selling

By 
Greg Lindenberg, Editor, CSP

Sunoco

DALLAS -- With the sale of more than 1,100 company-operated convenience stores in 18 states to 7-Eleven, Sunoco LP made clear its intention to shift its focus away from retail and toward wholesale fuel distribution.

For $3.3 billion, 7-Eleven is acquiring the company-operated Sunoco locations primarily along the East Coast and in Texas—approximately 110 stores in Florida, 450 stores in New York and 550 in Texas. It is also acquiring the trademarks and intellectual property of the Stripes c-store brand and the Laredo Taco Company foodservice brand.

Sunoco also is selling 207 company-operated c-stores, 182 in West Texas and New Mexico and 25 in Oklahoma and North Texas, in a separate process.

The Stripes c-store brand is divided between the two deals, with some stores going to Irving, Texas-based 7-Eleven and some stores among the separate sale, Sunoco spokesperson Alyson Gomez told CSP Daily News.

Dallas-based Sunoco LP is a master limited partnership (MLP) that operates 1,345 convenience stores and retail fuel sites and distributes motor fuel to 7,845 c-stores, independent dealers, commercial customers and distributors in 30 states.

Here are four details on why Sunoco is selling most of its company-operated retail outlets …

1. Leverage

Sunoco signage

During a recent earnings call, Sunoco executives acknowledged that they were concerned about the company’s leverage metrics.

As of the end of the fourth quarter, Sunoco’s net debt-to-adjusted EBITDA (earnings before interest, tax, depreciation and amortization) ratio had grown to 6.5x, even after the company sold $71.4 million in stock units to pay down some debt. A leverage ratio below 4.0x is typically considered safe for an MLP.

Sunoco LP's leverage has risen because of its acquisition activity over the past few years, according to a report by The Motley Fool. In November 2015, it completed a $2.226 billion dropdown transaction with its former parent company, Dallas-based Energy Transfer Partners (ETP). Sunoco LP paid ETP $2.2 billion in cash and $194 million of its stock units. That deal capped $5.7 billion of transactions between Sunoco LP and ETP, resulting in a “stunning” rise in its leverage as it borrowed heavily to finance these deals, the report said.

The company has completed several other recent retail and wholesale acquisitions, including Denny Oil Co. Inc., Nacogdoches, Texas; Kolkhorst Petroleum Co., Navasota, Texas; Valentine Stores Inc., Watertown, N.Y.; and the fuels business of Emerge Energy Service LP, Southlake, Texas.

While Sunoco LP issued new units and long-term debt to pay down its credit facility, these deals have not generated a consistent earnings stream, the Fool said, which is why the leverage ratio has grown.

2. Liquidity

Sunoco gas station

Earlier this month, “to address some short-term concerns around leverage,” Sunoco LP’s general partner, Energy Transfer Equity (ETE), infused Sunoco with $300 million liquidity through a private, perpetual preferred offering of stock, Sunoco LP President and CEO Bob Owens said during an April 6 investor conference call to announce the deal with 7-Eleven. But the infusion “didn’t answer our full needs on an ongoing basis,” he said.

The leverage issue now has the company’s “full attention and focus,” said Owens. “We were looking at all alternatives to correct the problem, and … nothing was off the table in terms of options to accomplish that.”

3. Divestiture

7-Eleven store

“Over the last several months, we’ve talked about our leverage and coverage concerns,” Sunoco LP CFO Tom Miller said on the April 6 investor call. “The divestiture out of company-operated retail operations and the simplification of our business addresses this issue. The transaction with 7-Eleven, in combination with the sale of our convenience stores in West Texas, New Mexico and Oklahoma, significantly improves our financial position.”

The divestiture proceeds will allow Sunoco LP to reduce its leverage ratio. “We expect to be in the 4.5x to 4.75x range,” he said.

The sale of the company-operated c-stores to 7-Eleven is “a pivotal first step in both addressing [the leverage] issue and in terms of the beginning of a process to evolve Sunoco into a premier nationwide fuel supplier with a lean, concentrated and simplified business model highlighted by stable cash flows,” said Owens.

“By the end of the year, we expect to be a focused, streamlined MLP-qualifying business,” Miller said. “We are well-positioned with our dealer and distributor networks, as well as our unbranded customers. Going forward, our wholesale focus, scale and customer base makes us a leading fuel supplier. Our new relationship with 7-Eleven has the opportunity to expand, where we use our superior wholesale business to partner with 7-Eleven’s world-class retail effort.”

4. APlus and Aloha

Aloha Petroleum gas station

“Sunoco will continue with a platform for the iconic Sunoco fuel brand and successful APlus [c-store retail] franchise,” said Gomez, the Sunoco spokesperson. “All of our APlus franchise stores will remain an important aspect of our business.” There are about 400 APlus stores, according to company reports.

“Sunoco’s transaction with 7-Eleven is the first step in Sunoco’s strategic shift away from company-operated convenience stores to focus on its industry-leading fuel supply business,” she said. “Led by the iconic Sunoco fuel brand and successful APlus franchise, Sunoco plans to be a leading consolidator in the domestic wholesale fuels business, supplying fuel to a network of more than 8,900 locations of third-party dealers, distributors and other commercial customers.”

The deal with 7-Eleven also excludes Aloha Petroleum, with 54 retail locations in Hawaii, which Sunoco will not divest and “will remain a part of Sunoco,” Owens said during the conference call.

“Both of those assets are key to us going forward, things we’re interested in growing,” he said. “Aloha Petroleum continues as a highly efficient, integrated, standalone operation within Sunoco, and our successful APlus franchise offer will continue to be an area that will grow.”

And Sunoco is no longer in the business of building new-to-industry (NTI) c-stores.

“In terms of the fragmented nature of the industry as the major oil companies divested all ownership of real estate in the United States—that environment still exists, and we think there’s a real part for us to play in that as that rollup continues, working with partners that we currently have and looking to M&A activity to grow the business on the wholesale side in addition to more midstream-type of asset opportunities,” Miller said.

  • Click here to read part II of this report, Why 7-Eleven Is Buying.