Sunoco ‘Well Positioned’ for Stability, Growth

Greg Lindenberg, Editor, CSP

sunoco gas station

DALLAS -- Sunoco LP’s “business performed well in the fourth quarter, with strong wholesale margins and continued cost reductions,” President and CEO Joe Kim said during the company's earnings call for the last three months of 2018.

Following the end of the quarter and the year, Sunoco closed on the strategic divestiture of most of its convenience stores in the continental United States to Irving, Texas-based 7-Eleven Inc. on Jan. 23, with gross proceeds totaling approximately $3.2 billion.

  • 7-Eleven ranked No. 1 on CSP's 2017 Top 202 list of the largest c-store chains in the United States. Ahead of the 7-Eleven deal, Sunoco ranked No. 6 on the list. Click here to read "Ranking the Top 40 C-Store Chains: A Year-End Review."

With the deal in the rearview mirror, Sunoco is now looking ahead. “With our transformation almost complete, now the focus shifts to execution,” Kim said.

Here are the details …

4 steps toward growth and stability

7-eleven doughnuts

“We have positioned Sunoco for future stability and growth,” said Joe Kim, president and CEO, on the call. Sunoco has completed three steps to get to this positioning, he said:

  1. Completing the 7-Eleven transaction. “This transaction was obviously vital to our transformation,” said Kim. “One of the keys to this deal was converting one of our more volatile income streams, company-operated fuel margins, to a 15-year take-or-pay contract, which is now one of the most stable income streams.”
  2. Fixing the company’s capital structure. “With the recent repayment in full of our term loan and the paydown of all outstanding borrowings on our credit facility, we have positioned ourselves to operate within a leverage ratio of 4.5 to 4.75 times for 2018 and beyond.”
  3. Sunoco has become an overhead- and capital-light model. “Going forward, both our maintenance capital and [general and administrative] expense guidance will be 50% less than the average over the last two years.”
  4. The company still has a fourth step to complete, which is the conversion of its company-operated sites in West Texas to the commission-agent model. “We expect to complete the conversion by the end of the first quarter,” Kim said.

Sunoco signed an agreement last year for a commission agent to operate 207 retail sites in certain West Texas, Oklahoma and New Mexico markets that were not included in the transaction with 7-Eleven.

4 key acquisition variables

sunoco fueling truck at station

“With our transformation almost complete, now the focus shifts to execution,” Kim said. “We have an executable growth plan. We have developed a robust M&A pipeline that includes multiple acquisition opportunities. Based on our assessment of various negotiations, we believe that we are well positioned to close on attractive opportunities in the near future.”

He highlighted four key acquisition variables for defining an attractive acquisition:

  1. Sunoco’s primarily focus is on the “highly attractive” fuel distribution and logistics sector. “The sector remains fragmented and trades at reasonable multiples," he said. "Numerous opportunities of reasonable size exist for acquisitions and single-digit multiples.”
  2. Sunoco will use its scale, brand and buying power to create material synergies. “Scale is vital in this business," he said. "The synergies we bring to acquisitions allow us to reduce purchase multiples by one to two times.”
  3. Sunoco will use a portfolio management approach to balance and stabilize its income streams. “Our wholesale fuel margins have been highly stable year after year," he said. "As we add future growth, we'll properly weight the additional income streams to ensure continued stability. This includes various fuel distribution channels, real-estate income and adjacent sectors such as refined product terminals.”
  4. Future growth must fit within Sunoco’s capital- and overhead-light model. “This provides us with higher G&A synergies and higher distributable cash flow. … We're not going to run company-operated stores over the long run. We may acquire a company-operated store, but we'll use our vast channels and our vast customer network and relationship to channel manage that to the highest realization for us.”

Tweaking the deal

sunoco gas station

The transaction involving the transfer of 1,030 of Sunoco’s company-operated c-stores to 7-Eleven also included a 15-year, take-or-pay fuel supply agreement under which Sunoco will supply approximately 2 billion gallons of fuel annually, with an additional 500 million gallons of committed growth over the first four years, starting in 2018.

“In total, roughly 300 million gallons have shifted from the original 7-Eleven fuel supply agreement to alternate higher-margin channels within our portfolio,” said Scott Grischow, Sunoco’s director of investor relations and treasury, said on the call. “We were able to leverage our channel-management strategy with these sites to ensure that we retain all previously reported fuel volumes.”

Meanwhile, the Federal Trade Commission (FTC) ruled that the acquisition would violate federal antitrust law and would harm competition in 76 markets. Under the terms of the consent agreement that has allowed the deal to go forward, 7-Eleven agreed to sell 26 retail fuel outlets that it owns to Sunoco, and Sunoco is retaining 33 fuel outlets that 7-Eleven otherwise would have acquired.

Sunoco has converted 19 of the 33 fuel outlets, primarily located in Texas, Florida and Pennsylvania, to Sunoco’s commission-agent channel, and the company expects to convert the remaining locations to this channel by the beginning of March, Grischow said. “The commission-agent structure allows Sunoco to have full control over fuel pricing and supply at all of these locations and to receive a stable rental income stream,” he said.

Sunoco paid approximately $50 million for the 26 sites, he said: “The majority of these sites are in South Texas, and about one-thirds of their locations are fee-simple properties. These sites will be converted into our commission-agent model. We anticipate closing on this acquisition and completing the conversion to the commission-agent platform by the second quarter of 2018.”

Sunoco also retained 23 sites along the New Jersey Turnpike and New York Thruway. “These sites operate under long-term agreements with the respective authorities, and we will continue to assess and implement the highest-value option at these locations,” he said.

Financial results

sunoco gas station

For the three months ended Dec. 31, 2017, Sunoco LP reported revenue of $3 billion, an increase of 4.8%, compared to $2.8 billion in fourth-quarter 2016. The increase was the result of the average selling price of fuel being 25 cents per gallon higher than last year.

Total gross profit decreased to $277 million, compared to $296 million in fourth-quarter 2016, as a result of lower motor-fuel gross profits.

Net income was $232 million vs. a net loss of $585 million in fourth-quarter 2016.

Adjusted EBITDA totaled $158 million, compared with $154 million in fourth-quarter 2016.

On a weighted-average basis, fuel margin for all gallons sold was 15.3 cents per gallon, compared to 14.3 cents per gallon in fourth-quarter 2016. Sunoco attributed the 1-cent-per-gallon increase to higher wholesale margins.

Net income for the wholesale segment was $47 million compared to $63 million in fourth-quarter 2017. Adjusted EBITDA was $90 million, vs. $78 million in fourth-quarter 2016. Total wholesale gallons sold were 1,346 million, compared to 1,359 million in fourth-quarter 2016, a decrease of 1%. Sunoco earned 11.1 cents per gallon on these volumes, compared to 9 cents per gallon a year earlier.

Net income for the retail segment was $185 million, compared to a net loss of $648 million in fourth-quarter 2016. Adjusted EBITDA was $68 million, versus $76 million in fourth-quarter 2016. Total retail gallons sold were flat compared with a year ago at 626 million gallons. Sunoco earned 24.2 cents per gallon on these volumes, compared to 25.7 cents per gallon in fourth-quarter 2016.

Total merchandise sales increased by 0.5% from fourth-quarter 2016 to $568 million, reflecting an increase in merchandise and restaurant sales across the Texas oil-producing regions. Merchandise sales contributed $173 million of gross profit with a retail merchandise margin of 30.6%, an increase of 0.7 percentage points from fourth-quarter 2016.

Same-store merchandise sales decreased by 0.8%, and same-store gallons decreased by 1.4% during the fourth quarter, reflecting weakness across the East Coast. In the Texas oil-producing regions, same-store merchandise sales increased by 11.2%, and same-store gallons increased 4.8%.

C-store count

sunoco gas station

Dallas-based Sunoco distributes motor fuel to about 9,200 convenience stores, independent dealers, commercial customers and distributors in more than 30 states. Its general partner, Sunoco GP LLC, is owned by Energy Transfer Equity LP.

As of Dec. 31, 2017, prior to the closing of the 7-Eleven and commission-agent deals, Sunoco’s retail segment operated 1,348 c-stores:

  • 746 Stripes c-stores in Texas, New Mexico, Oklahoma and Louisiana. (Sunoco has implemented the proprietary Laredo Taco Company restaurant concept in 477 Stripes c-stores.)
  • 441 c-stores primarily under the proprietary Sunoco fuel brand, including 404 APlus c-stores, and located mainly in Pennsylvania, New York and Florida.
  • 107 MACS c-stores in Virginia, Maryland, Tennessee and Georgia.
  • 54 Aloha Petroleum c-stores under the Aloha-, Shell- and Mahalo brands.

Following the 7-Eleven and commission-agent deals, Sunoco will have approximately 80 company-operated sites (including the Aloha and turnpike sites), approximately 400 commission-agent locations, approximately 2,700 dealer locations (including 979 7-Eleven sites) and approximately 3,800 distributor locations, according to the company.