3 Ways Sunoco Will Refocus on Fuel
By Samantha Oller on Apr. 10, 2017DALLAS -- With the pending sale of approximately 1,110 retail locations to 7-Eleven Inc. parent Seven & i Holdings Co. Ltd., Sunoco LP is positioning itself to become a “premier nationwide fuel supplier” with an emphasis on growing wholesale volumes instead of retail sales.
“The plan is to be the finished petroleum product arm of the ET family,” said Bob Owens, president and CEO of Sunoco LP, referring to master limited partnership (MLP) parent Energy Transfer Equity LP (ETE) during an analyst call about the deal. “As we look at the marketplace in total and the assets we have available, there’s lots of room to grow that.”
While Dallas-based Sunoco is holding on to more than 50 retail sites in Hawaii through its Aloha Petroleum business as well as its APlus convenience-store franchise, it is investing its future growth in the iconic Sunoco fuel brand.
Here are three elements of Sunoco’s upcoming streamlined wholesale- and midstream-centered business ...
1. Sunoco brand growth
Sunoco supplies fuel to about 6,900 distributor, dealer and commercial locations throughout the Northeast, Southeast and parts of the Midwest. Distributors made up 46% of the wholesale volume, followed by dealers at 35% and commercial at 19%.
The wholesale business has provided more than two-thirds of Sunoco’s fuel gallons and 37% of its fuel gross profit. In 2016, Sunoco added more than 300 million gallons to its annual fuel volumes with a series of acquisitions, which also helped grow its wholesale gallons by 9.5% year-over-year.
Growing this business further on the strength of the Sunoco fuel brand will now become front and center.
“We continue to believe one of the key assets of the corporation is the attractiveness of the iconic Sunoco fuel brand, and that provides us with ongoing significant growth opportunities, both with partner 7-Eleven, … as well as with other third-party players,” said Owens.
Post-transaction, branded distributors will have 31% share of Sunoco’s wholesale fuel volumes, followed by dealers with 26% and commercial at 13%. Wholesale margins are targeted for the 6- to 8-cents-per-gallon range.
Owens cited the Sunoco brand’s partnerships with NASCAR, Verizon IndyCar, the National Hot Rod Association and 35 other sanctioning bodies as one of its key strengths. The brand also has a strong presence along turnpikes and toll roads stretching from Indiana to New York.
Sunoco is also a significant distributor of other fuel brands, including ExxonMobil, Chevron and Valero.
2. 7-Eleven supply contract
As part of the transaction, Sunoco will have a 15-year, fixed-margin, take-or-pay supply contract with 7-Eleven subsidiary SEI Fuel. It is structured around a base volume of 2.2 billion gallons per year, with a commitment to grow this by 500 million gallons over the first four years. All Sunoco-branded sites being acquired by 7-Eleven will remain so.
Post-transaction, 7-Eleven will make up 29% of Sunoco’s wholesale fuel volumes; because the contract is take or pay, wholesale margin volatility should be greatly reduced for Sunoco, execs said.
“We think this is an attractive construct for both companies, giving surety of supply on the 7-Eleven side and surety of cash flow on the Sunoco side,” said Owens.
Sunoco executives declined to share specifics on the supply contract with 7-Eleven, instead describing it as “market-related prices we feel are beneficial for both parties,” said Owens. “It gives certainty to 7-Eleven from the supply standpoint and an attractive brand, and certainty to us with ratable cash-flow commitments going forward. We view it as a win/win.”
They also do not expect any fall-off in fuel volumes with 7-Eleven as the owner of the sites. “These guys are good operators; it’s in their interest to continue to drive customer counts, and you drive customer counts by being competitive both on the fuel side and merchandise side,” said Owens.
3. Midstream integration
Sunoco also sees more opportunity to maximize the synergies and further integrate with its midstream assets.
Aloha Petroleum Ltd., Honolulu, which Sunoco acquired in December 2014, will stay with the business in large part because of its completely integrated business structure. This includes six terminals, 54 c-stores and a large wholesale business on four Hawaiian islands.
Owens also cited Emerge Energy Services LP, whose fuel business Sunoco acquired in August 2016, and which brought two terminals and around 174 million gallons of wholesale business.
As Sunoco’s financials stabilize around this streamlined core of businesses, it sets the stage for both organic growth and “disciplined M&A”—in particular, opportunities that add value, maintain leverage and are accretive to the business.
“We’ll look to continue to grow existing wholesale channels, targeting core markets and seeking opportunities to diversify geographically in other qualifying businesses,” said Owens.