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Management's acquisition of Sunoco is soaking up huge resources, but tantalizing growth potential means this was a risk worth taking.
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Energy Transfer Partners (ETP +0.00%) is a company in transition, as a result of a major acquisition campaign designed to branch out into new regions and businesses. One of Energy Transfer's major strategic initiatives that has paid off was its investment in Sunoco Logistics, which has significantly increased value for Energy Transfer's investors.
Costs in the Sunoco segment increased significantly in recent months, which resulted in declining earnings in the fourth quarter. And, the fact that management is allocated significant capital to grow the business may concern some. However, it's plain to see for Foolish investors that the huge amounts of resources allocated to Sunoco are paying dividends. Management is setting its eyes on even bigger things in the future, with even greater investment planned this year. If strong results continue, the Sunoco bet will shape up to be a big winner.
Energy Transfer Partner's major push
Over the past couple of years, Energy Transfer Partners has gone on a spending spree with the goals of building out its geographic and product diversity. Energy Transfer acquired Sunoco in 2012 for $5.3 billion. A slew of benefits from the deal have been plain to see. Energy Transfer is now even more heavily entrenched in some of the premier natural gas producing areas of the country, such as the Marcellus Shale in Pennsylvania. The strategic shifts have also moved Energy Transfer's product mix toward heavier hydrocarbons such as natural gas liquids and crude oil. In addition, the acquisition gave Energy Transfer a pronounced retail presence by adding Sunoco's 4,900 retail locations in the United States.
In the retail business, Energy Transfer announced it will acquire Susser Holdings Corp. (NYSE: SUSS) for approximately $1.8 billion. Acquiring Susser expands on the retial initiative by adding its 630 gas stations. According to management, Energy Transfer's ultimate end game is to keep growing the retail business until it's ready to exist as a stand-alone entity, through Susser Petroleum Partners (NYSE: SUSP). This is a surprise, since Wall Street analysts had previously anticipated an outright sale of Energy Transfer's retail unit.
Disappointment over Energy Transfer's investment in Sunoco is only possible through a short-term lens. It's true that the Sunoco Logistics division posted $210 million in adjusted EBITDA in the fourth quarter, down from $219 million in the same period last year. The reason is rising costs in that division, which brought down the gross margin for the Sunoco investment by 18% in the fourth quarter. Energy Transfer allocated more than $1 billion in capital expenditures to its Sunoco investment last year, more than 40% of its total capital expenditures for the year.
Still, investors need to take a long-term view to gauge management's strategy. One poor quarter doesn't make or break any investment. Looking further back, it's clear that the investment is actually paying off. For the full year, the Sunoco Logistics unit posted $871 million in adjusted EBITDA, according to the company's 2013 10-K. That was up from just $219 million in 2012. If you're keeping score, that's a nearly four-fold increase, which makes the Sunoco segment the company's second-largest by EBITDA.
Significant capital expenditures are expected to continue through 2014 as well, which will pave the way for future growth. For the current year, management has budgeted more than $2 billion in growth expenditures, a full 60% of which will be allocated toward the Sunoco investment. It's clear that management is placing a big bet on Sunoco and retail more broadly.
Don't miss the big picture
The bottom line is that while Energy Transfer's massive investment and continued expansion plans for the Sunoco segment are a risk, it's likely a risk worth taking. Management is already realizing huge contributions from the investment, and continued synergies and growth opportunities mean the future is likely promising as well. While there are no guarantees, it's looking like the investment is Sunoco was a very wise one.