Image source: Sunoco LP corporate website.
Sunoco LP (SUN +0.27%) ended the first quarter as a very different company from the one that started it, but the company's earnings results didn't really reflect it. After completing its final dropdown from parent companies Energy Transfer Partners (ETP +0.00%) and Energy Transfer Equity (ETE 0.41%) on the last day of the quarter, chances are next quarter's results will be much more important to the company's future.
Still, it's worth checking in with the company to see how it performed to make sure it can meet operational expectations and that it's not just masking poor performance with big acquisitions. So let's look at the numbers for this past quarter and what options the company has once its new assets are part of the fold.
By the numbers
One of the things to keep in mind when looking at Sunoco's results is that revenue isn't necessarily indicative of growth since it's sensitive to gasoline prices, but Sunoco will normally see similar declines in the cost of goods as it buys cheaper feedstocks. Also, the company's distributable cash flow for the first quarter of 2015 doesn't count about $87 million in preacquisition earnings, so those two aren't really a good apples-to-apples comparison.
| Metric | Q1 2016 | Q4 2015 | Q1 2015 |
|---|---|---|---|
| Revenue | $3,202 | $3,674 | $4,342 |
| Adjusted EBITDA | $158.8 | $112.2 | $127.3 |
| Net income per share | $0.47 | $0.13 | $0.44 |
| Distributable cash flow | $111.5 | $90.2 | $30.4 |
| distribution coverage ratio | 1.14 | 1.04 | 1.2 |
Source: Sunoco LP earnings release. Numbers in millions, except per-share data.
The one thing that can be pulled from the earnings that was a big positive was improved margins across the board. Both retail and wholesale fuel margins increased compared with this time last year. While over time margins at this business have been rather consistent, they are still going to vary slightly from time to time and are mostly out of Sunoco's control. Among the things the company can control, though, are retail merchandise margins, which improved 10 basis points. That may not sound like much, but in a high-volume business like Sunoco's gas stations, small percentage points can add up quickly.
The highlights
The biggest event for Sunoco in the quarter happened on the last day of the quarter, when the company completed a $2.2 billion dropdown acquisition of Energy Transfer Partners' remaining retail and wholesale fuel marketing assets. The deal caps off the 18-month transformation that Energy Transfer Started when it bought Susser Holdings Partners and started consolidating all of its retail and wholesale assets under both the Sunoco brand and business. So just like how this past quarter's results weren't exactly comparable to prior quarters, the coming quarter won't have a decent comp.
Beyond this major acquisition, the company plans to construct 35 to 40 new retail sites in all of 2016. That's a pretty modest amount when you consider Sunoco either directly owns or franchises 6,800 stations in the U.S., but the company has said that this growth plan excludes any potential acquisitions that could come its way. Considering how fragmented the retail station market is, there is ample opportunity to grow via M&A.
Looking ahead
The big challenge for the company will be how to finance any potential acquisition in the near future. The company is generating a little excess distributable cash each quarter, but those amounts are still rather small and aren't yet enough to cover its organic new-store investments. The company still has some room left on its revolving-credit facilities, but no company wants to max those out. Debt in general, though, is starting to reach its upper limit. The company's net debt-to-EBITDA ratio is currently 5.4, which is a little on the high side for any company structured as a master limited partnership. We'll need to see how much the recent dropdown of Energy Transfer's assets increases EBITDA before making a judgment here, but it's already looking high.
At the same time, the company's current distribution yield of 9% suggests that issuing shares today isn't a very lucrative way to raise capital. Add all this up, and Sunoco may be in for a lull in growth until it can find a suitable source of capital.
What a Fool believes
The recent growth at Sunoco does look rather tempting to any investor who wants to consider a slightly more stable part of the oil and gas industry. The bountiful amount of assets Energy Transfer Partners has dropped down into Sunoco has allowed it to raise its distribution rather quickly over the past year, and the most recently closed deal will increase it even further.
The real long-term question for the company is whether it will find the resources to grow even further. Its recent run-up of debt and cheap share prices means the capital markets aren't that attractive, and it's not yet generating enough cash in-house to support its own growth. Once we get a better idea what the company's financial performance looks like with this recent dropdown in tow, then it will be easier to make a decision on Sunoco's stock. Until then, it may be worth waiting a quarter or two before jumping in.
