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Why Sunoco LP Units Rallied 58% in April

By Reuben Gregg Brewer – May 7, 2020 at 11:03AM

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After a terrible March, the gasoline distributor's stock bounced most of the way back last month, but the COVID-19 pandemic will likely cause more pain for the company.

What happened

Units of gasoline distributor Sunoco LP (SUN 1.22%) rose an impressive 58% in April according to data from S&P Global Market Intelligence. That was a big turnaround from March, when the master limited partnership was off by 42%. Yes, the broader markets were part of the story, with the S&P down 13% in March and up 13% in April, but there was clearly more going on at Sunoco, which ended the two-month period down about 8.2% overall. 

So what

Sunoco operates in the energy sector, which has seen huge upheaval of late due to a massive supply/demand imbalance that has left oil prices at painfully low levels. What's a little unique here is that Sunoco focuses on getting gasoline to gas stations. That's a vital service that wasn't impacted by COVID-19 non-essential business shutdowns. However, those shutdowns and social distancing requirements did materially reduce demand for fuel across the country. 

A woman pumping gasoline into a car

Image source: Getty Images

In late March, the partnership announced a huge 40% reduction in its capital spending plans, a 30% drop in its maintenance spending, and other cost-cutting measures. It was clearly pulling back hard in the face of adversity. With the markets worried and the energy industry already in a terrible state, it's hardly surprising that Sunoco's stock swooned in March. That said, Sunoco reported in early April that it would be paying its next distribution as planned, notably avoiding a distribution cut. With 1.3 times distribution coverage in 2019, the partnership has a little bit of wiggle room in the face of adversity. That, along with an improved mood on Wall Street, clearly helped lift the stock in a big way in April.    

Now what

Sunoco's focus on supporting gas stations is pretty unusual. Although it is definitely a necessity business, demand for gasoline has fallen sharply due to pandemic-necessitated social distancing and the shutdowns of large swathes of the economy. While the partnership's decision to maintain its distribution is a positive, as were its efforts in recent years to diversify into storage and pipelines, this is not really an appropriate stock for conservative investors even in more normal times because of its tight focus on delivering gasoline. Most would be better off looking at a larger, more-diversified energy stock. Notably, some of the larger midstream names, like Enterprise Products Partners, have far more robust distribution coverage ratios.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.

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