Why Sunoco Is ‘Economic Cycle-Proof’

Plans organic growth for Texas; smaller acquisitions imminent, but no spoilers

By 
Greg Lindenberg, Editor, CSP

Sunoco

HOUSTON -- Sunoco LP is targeting Texas for new-store expansion, although acquisitions in attractive markets elsewhere are always a possibility. The company is “looking at organic growth opportunities in areas of this state that are less influenced by oil price cycles,” CEO Bob Owens said during the fiscal fourth-quarter 2015 earnings call.

“Excluding the oil-producing regions, the Stripes market area still represents some of the best opportunities and fastest-growing locations within our retail portfolio for continued organic growth,” he said.

Owens said that the company “is not exposed to the downside effect of low oil and gas prices in a way that most other partnerships are.”

He said that although many other master limited partnerships (MLPs) “are hurt by low oil prices, our business is generally agnostic to the absolute price of crude oil. Over time our margins have proven to revert to a mean. ... We have stable, long-term contracts that support a wholesale business, and our retail store operation has spread across some of the fastest-growing markets in the United States. All of this helps mitigate the impact of commodity price volatility and growth differentials in particular regions or in particular states. And, while fuel margins may swing from one month or even quarter to quarter, over time, our fuel margins trend consistently year in and year out. And on top of that, merchandise sales at convenience stores within the industry have proved to be largely economic cycle-proof.”

On the acquisition front, while Sunoco LP executives “are working on some smaller deals,” there were no spoiler alerts from Owens. “I am optimistic that we will be in a position to do that shortly,” he said. “Those opportunities will continue to present themselves.”

Owens did, however, describe the kinds of deals the company is looking at. “We are seeing similar kinds of multiples that you saw us pay for, whether it was Aloha Petroleum or the $120 million worth of deals we did last year which are single-digit, higher single-digit multiples. And we believe that those opportunities will continue to present themselves. … We look at a lot more deals then we pull the trigger on.”

He added, “We keep an absolute rigid set of criteria, in that sites have to be in attractive markets. They have to be assets that we believe will be viable long-term. From a competitive standpoint. And the last box that they have to tick, the third leg of this stool, is that we have to be able to complete the deal in a financially attractive price level such that it's accretive for our unitholders. But we think we will continue to see opportunities there.”

Owens also recapped the dropdown transaction, announced in Nov. 2015, by which Sunoco LP agreed to acquire the remaining 68.42% of Sunoco LLC and 100% interest in the legacy Sunoco Inc. retail business from Energy Transfer Partners (ETP), including 438 company-operated Sunoco and APlus branded c-stores and other retail fuel outlets across the country, for approximately $2.226 billion, effective Jan. 1, 2016.

“This transaction is really important to us because it expands the current retail network to the Northeast and further grows the existing wholesale business,” he said.

The company expects to close the transaction in March, Scott Grischow, director of investor relations and treasury, said during the call.

Houston-based Sunoco LP is a master limited partnership (MLP) that operates approximately 900 convenience stores--including 725 Stripes locations and the 175 Mid-Atlantic Convenience Stores (MACS), Tigermarket and Aloha locations--and distributes motor fuel to convenience stores, independent dealers, commercial customers and distributors located in more than 30 states at approximately 6,800 sites, both directly and through its 31.58% interest in Sunoco LLC, owned in partnership with ETP. Its parent, Energy Transfer Equity (ETE), owns Sunoco LP’s general partner and incentive distribution rights. ETP owns a 36.4% limited partner interest.