After shooting itself in the foot with an overambitious growth plan and a bloated balance sheet, Sunoco LP (NYSE:SUN) has spent much of 2017 trying to recover from those mistakes. This past quarter, the company's results showed some signs that things were getting better, but what really matters is the closing of its multi-billion dollar sale expected to occur in the fourth quarter.
Here's a brief look at Sunoco's most recent results, a status update on the fuel retailer's divestment plans, and what to make of all these deals.
By the numbers
|Metric||Q3 2017||Q2 2017||Q3 2016|
|Revenue||$2.55 billion||$2.4 billion||$2.16 billion|
|EBITDA||$217 million||($148 million)||$182 million|
|Distributable cash flow||$125 million||$158 million||$123 million|
Sunoco's business of selling retail and wholesale fuel is a notoriously low margin business. The gross profit per gallon of fuel sold will be in the 10 cents to 20 cents range. Since it sells so much fuel, though, the bottom line can move sharply with just a couple penny difference in fuel margins.
This past quarter, the gross margin for fuel was more or less in line with the prior year result. The largest difference between this result and the prior year's was a $55 million inventory adjustment that boosted EBITDA. If we were to adjust the quarter for inventory valuation changes and other one time, non-cash charges, adjusted EBITDA for Q3 2017 was $199 million, which was much closer to the $189 million in adjusted EBITDA from the prior year.
At the end of the quarter, Sunoco had a leverage ratio -- defined by its debt covenant as debt to adjusted EBITDA -- of 5.59 times. That doesn't sound great, but it puts the company ahead of its schedule for improved credit metrics. Under a previous agreement with its creditors, Sunoco's debt to adjusted EBITDA had to be below 6.75 times by the end of 2017 and be below 5.5 times by the first quarter of 2019. So it's encouraging that management has been able to make that kind of progress
In a way, though, these results are a moot point because they include all of Sunoco's retail stations that it sold to 7-Eleven back in May. The $3.3 billion sale and wholesale supply contract should close in the fourth quarter and will significantly alter these results. Once it goes through, management has said it will use some of the proceeds to reduce debt.
What management had to say
On top of the 7-Eleven deal, newly appointed CEO Joe Kim said on the company's conference call that it also has another retail store sale in the works.
First, the 7-Eleven package; our team continues to work diligently toward closing. We believe the transaction is in the latter stages of the regulatory approval process with the FTC. We continue to work for the closing in late fourth-quarter of 2017 subject to completion of the regulatory process. However, there is a possibility that closing does not occur until early first quarter of 2018. As for the West Texas package we are currently in [final] negotiations with a quality buyer. Upon the completion of due diligence and final negotiations we estimate to sign purchase agreements sometime in the fourth quarter of this year, which will position us for a close in the first quarter of next year.
Later in the call, CFO Thomas Miller said that the proceeds will be used to reduce its leverage ratio to 4.5 to 4.75 times, repurchase equity, and fund acquisitions. Before investors get too excited about a share repurchase program, keep in mind that Sunoco is required to repurchase all $300 million of its preferred equity before buying back common stock
What a Fool believes
To be honest, it's still hard to get a gauge on what Sunoco will look like after all of these transactions. All of the things management has said make the deal look attractive -- more stable revenue from long-term purchase agreements, better debt metrics, share repurchases, accretive acquisitions using cash -- but the devil is always in the details. The company's stock still has a distribution yield of 10.9%, which suggests Wall Street doesn't have a lot of faith in this turnaround plan.
Once these retail location sales are complete and we can put this leaner version of Sunoco under the microscope, then we will get a better idea whether this stock looks attractive or not. Until then, it's probably best to sit this one out.