With shares of Sunoco LP (NYSE:SUN) carrying a distribution yield of more than 13%, there are clear concerns that the company will struggle to maintain its payout. Based on the company's third-quarter earnings, though, there are some signs that it may be able to work through it.
Let's take a quick look at the results from Sunoco's most recent quarter and whether this is a signal to investors that its payout isn't under great duress.
By the numbers
|Results*||Q3 2016||Q2 2016||Q3 2015|
|Net income per share||$0.24||$0.53||$0.30|
|Distributable cash flow||$124.1||$91.9||$112.4|
|Distribution coverage ratio||1.25||0.93||2.0|
The transactions the company has done over the past year or so have made it hard to analyze Sunoco's results from quarter to quarter. The major drop-down acquisition from parent company Energy Transfer Partners at the end of the first quarter carried with it some higher-than-normal transaction costs that were part of its distributable cash woes in the quarter. So don't assume that changes from quarter to quarter or year over year are necessarily good or bad because Sunoco's business has changed radically in the past six months.
This quarter, there were a few things working against Sunoco. Retail and wholesale fuel margins were a bit lower than they have been in prior quarters, and many of its retail stations in Texas are suffering from an economic malaise that has hit the region. Still, the company was able to generate a good amount of cash that -- coupled with an unchanged distribution payout -- helped to boost its coverage ratio to a much healthier 1.25 times.
From an operational standpoint, it was a pretty dull quarter. The company did complete its Emerge Energy Services deal on Aug. 31, which added about $2 million in EBITDA to the bottom line, but since it was brought on line at such a late stage in the quarter, we didn't get to see what these assets will mean on a full quarterly basis. Also, while it didn't happen in the third quarter, the company did complete the purchase of several retail stations and a wholesale distribution business from Denny Oil on Oct. 12, so we can expect to see those assets contribute to the bottom line as well.
One of the surprising things is that there wasn't any operational issues considering that the Colonial Pipeline, one of the nation's largest and most critical refined product pipelines, was shut down for a couple weeks as part of a leak. The one thing this shows is that Sunoco has a pretty robust distribution network that was able to avoid some of the issues that others have suffered through. This will be put to the test again in the fourth quarter as there was an explosion and leak at the Colonial Pipeline again on Nov. 1.
What management had to say
On the company's ability to avoid issues in the quarter because of its operational and logistical strength, CEO Bob Owens said:
Further, our scale and diversity also allowed us to avoid any material setbacks related to the Colonial Pipeline outage late in the third quarter. And while we have previously noted SUN's scale and diversity as a key attribute to offset negatives like the oil producing regions, the same scale and diversity helps insulate us from logistical [fuel] interruptions. As we've seen recently with the Colonial Pipeline and any isolated weather impacts such as flooding in Texas we've seen this year and more recently with Hurricane Matthew. Looking back at the Colonial Pipeline incident that occurred in the third quarter, Sunoco's supply trading and transportation groups did an excellent job ensuring that our company operated locations were adequately supplied with fuel and also helped minimize any potential downtime at our locations. We were able to utilize supply options at waterborne facilities from Baltimore down to Charleston and also had the ability given our proprietary truck lead to truck product further inland to sites more severely impacted.
What a Fool believes
Its ability to post stronger results in the face of some industry headwinds is certainly encouraging, but there are still some financial questions that investors may want to see addressed. The company's debt to EBITDA is still a bit high at 7.1 times. Management plans to bring that rate closer to 5.0 times as it grows the business through some organic capital spending and acquisitions that will be funded in part from share issuances. If the company can bring down that debt load in the coming quarters, then it will certainly look like a much more appealing investment. However, it would be better to wait until we actually see an improved balance sheet before making any major decisions.