Trying to put a finger on the pulse of fuel distributor Sunoco LP (NYSE:SUN) hasn't been easy lately as the company has been reworking much of its corporate structure for the past year or so. Between asset sales, share repurchases, and debt elimination, too many balls were up in the air to make a definitive decision about its stock.
This past quarter, though, we got to see the company's financials after all of these recent moves. All in all, the numbers were much improved from prior quarters, but were they good enough to make this company a worthy investment? Let's run through the numbers and some highlights of the most recent quarter to see what to make of Sunoco.
By the numbers
|Metric||Q2 2018||Q1 2018||Q2 2017|
|Revenue||$4.51 billion||$3.75 billion||$2.69 billion|
|EBITDA||$126 million||($26 million)||($148 million)|
|Distributable cash flow||$99 million||$84 million||$158 million|
|Distribution coverage ratio||1.24||1.00||1.54|
After a quarter full of financial moves, this quarter we got to see Sunoco as a completely restructured business that focuses solely on wholesale fuel distribution with a very limited set of retail assets. Perhaps the most encouraging change in these earnings is that the company turned a decent profit and generated a much healthier amount of cash to cover its distribution. Keep in mind, though, that this is a seasonal business and that excess cash generated this past quarter may be needed to cover shortfalls in the second half of the year.
After all of the corporate moves it made in the first quarter, it should be much easier to cover its cash obligations. Between refinancing debt at a lower rate, eliminating its Series A preferred units, and buying back 17.6 million common units; Sunoco reduced its interest expenses and cash needed to cover its distributions by $41 million per quarter. That should certainly put its payout on more stable footing despite the fact that it is a much smaller business after either selling its convenience store network or converting them to franchise locations.
Maintaining its belief that the fuel distribution business is highly fragmented and can benefit from consolidation, management announced it acquired fuel distributor Sanford Oil for $66 million. The company distributes about 115 million gallons of fuel annually to the oil and gas industry, primarily exploration, drilling, and oil-field services companies. Sunoco's management says that this deal and the Superior Plus deal in the prior quarter are valued at very favorable returns (EBITDA multiples of five to six times) after counting anticipated cost synergies.
What management had to say
As part of his prepared remarks on the conference call, CEO Joe Kim emphasized that the company is executing on its strategy and that these recent acquisitions are examples of how this business will get stronger thanks to these smaller, bolt-on acquisitions.
The underlying business is strong, and we expect it to continue. Looking forward, the third quarter is off to a good start. In July, our margins were strong and our volumes continue to grow. Last December, we laid out a plan, and this year we executed on this plan. We fixed our balance sheet and we will continue to show financial discipline. We expect to be within our guided leverage range.
As per SG&A [sales, general, and administrative], rent expense and OpEx, we expect to deliver on the guidance we gave back in December. We also stated a targeted [distribution] coverage to be over 1.1. We're well positioned to meet this target. The acquisition of Superior Plus and Sandford Oil are two solid examples of delivering on our stated growth plan. We're positioned for more. These immediately accretive acquisitions are the type of opportunities we will continue to pursue in a fragmented marketplace.
A new Sunoco?
Ever since Sunoco went public back in 2012, its corporate strategy has vacillated from being a dropdown vehicle for parent company Energy Transfer Partners to a serial acquirer of fuel distribution and retail stations. Then, when the company had become overleveraged and unable to meet obligations, it decided to concentrate on just fuel distribution and use the proceeds of asset sales to reset its balance sheet.
While it appears that management has now settled on a plan, it's hard to say whether this strategy will stick around any longer than the prior ones. It's clear that it wants to remain a serial acquirer of smaller fuel distribution assets, and for some reason, banks have given Sunoco enough borrowing capacity to get itself in debt trouble again.
There is promise in this current iteration of Sunoco, but since the company doesn't have a long-standing reputation of consistency, it's probably best to see if it can execute on this current plan for a while before making any commitment to its stock.