Sunoco LP's Strategy: Integration & Growth
DALLAS — Sunoco LP's 2016 can be summed up in one word: transformative.
That was the term Bob Owens, president and CEO of Sunoco LP, used during the company's fourth-quarter earnings call Thursday morning.
"We began the year with the completion of the final dropdown from Energy Transfer Partners late in the first quarter. Shortly thereafter, we announced the opening of our corporate headquarters in Dallas, which consolidated our corporate infrastructure close to that of our parent company, Energy Transfer Equity," he explained. "Integration efforts also continued to be a focus in 2016 as we consolidated offices, people and systems across the company."
While these efforts did increase Sunoco's expense structure in 2016, Owens said the company is "confident these figures will decrease in 2017 as synergies and benefits from the 2016 consolidation initiatives come on line."
The past year also saw Sunoco continue its tuck-in acquisition activity with the addition of retail store locations, as well as new dealer and distributors under the Sunoco umbrella.
"I was able to meet many of our new partners earlier this month when we hosted over 1,000 people — including a number of our top wholesale customers — at our biannual dealer and distributor meeting," Owens said. "Turnout was strong and appreciated, and this bodes well for future growth in our wholesale channels."
GROWTH & ACQUISITIONS
In October, Sunoco closed on its previously announced Denny Oil Co. acquisition, comprised of six company-operated convenience stores and fuel supply contracts with approximately 127 wholesale dealers and 500 commercial customers in eastern Texas and Louisiana.
Sunoco also completed three third-party acquisitions in 2016. In the third quarter, the company acquired the fuels business of Emerge Energy Services LP. In the second quarter, Sunoco added the retail and wholesale assets of Kolkhorst Petroleum Inc., including the Rattlers convenience store chain, in Texas; and retail assets from Valentine Stores Inc. in New York.
"These four transactions totaled $335 million and added 38 company-operated locations and over 300 million gallons annually," Owens reported during Thursday's earnings call.
In addition, Sunoco is in the process of rebuilding and outfitting locations along the Indiana Toll Road. "We're very excited to unveil our Sunoco Diamond and APlus offering at these heavily traveled toll road locations," the CEO said.
As he explained, Sunoco has a large presence on a number of toll roads, including the New York Thruway, New Jersey Turnpike, Atlantic City Expressway (N.J.), Garden State Parkway (N.J.), Pennsylvania Turnpike, Ohio Turnpike, and locations along Interstate 95 in Delaware and Maryland.
"We are excited to continue this expansion westward through the state of Indiana," Owens said. "You now can drive from New York to Chicago and be served by Sunoco plazas the entire route."
Earlier this year, Sunoco retained NRC Realty & Capital Advisors LLC to assist it with strategic alternatives for roughly 100 real estate assets — a mix of active retail locations, dealer-operated locations, closed sites, undeveloped greenfield sites, and miscellaneous real estate properties. Sunoco expects to pay down debt with the proceeds from the initiative, according to Owens.
FINANCIAL RESULTS
For the fourth quarter of 2016, Sunoco reported a net loss of $585.2 million compared to net income of $16.5 million a year ago due to impairment charges that were recorded. Total adjusted EBITDA for the quarter decreased approximately $35 million year over year to $153.6 million.
Looking at operational performance, total fuel volume increased by 6.6 percent to 2 billion gallons. Retail gallons increased by 6.1 million gallons year over year, or by 1 percent to 626 million gallons. This was driven by the third-party acquisitions and new-to-industry locations opened during the past 12 months — primarily in Texas, the chief executive noted.
Wholesale gallons rose 9.5 percent to 1.4 billion gallons as a result of acquisitions, including the fuels businesses of Emerge Energy Services and Denny Oil, as well as growth in unbranded fuel sales.
Moving inside the store, merchandise sales increased $21 million year over year to $565.8 million as a result of market share gains in packaged beverage and beer sales, and c-stores acquired or built during the past 12 months.
Merchandise gross profit percentage decreased slightly from a year ago by 1.2 percentage points to 30 percent, Owens said, adding the "principal driver of this decrease was merchandising promotions unveiled during the quarter." While this merchandising gross profit percentage was below prior quarters, Sunoco foresees it returning to previously reported levels.
As for same-store results, same-store gallons dipped by 1.9 percent, while same-store merchandise sales were essentially flat. Merchandising strength in the company's East Coast operations were "virtually offset by continued weakness in Texas, primarily in the oil-producing regions," Owens stated.
Excluding the results from those oil-producing regions, same-store fuel gallons decreased 1.7 percent and same-store merchandise sales were positive, up 0.7 percent, he said.
"The oil-producing regions are beginning to show some improvement and are performing much better than recent quarters when we experienced same-store margin sales and same-store gallon percentage declines in the low- to mid-teens," Owens said. "Sunoco is not alone in this regard as other retailers, and restaurants in particular, have reported similar declines in these affected markets."
Sunoco has 140 retail stores in the oil-producing regions of Texas. Roughly 75 percent are in the Permian Basin, with the remainder largely in the Eagle Ford area.
As of Dec. 31, Dallas-based Sunoco LP operated 1,345 convenience stores and retail fuel outlets along the East Coast, in the Southwest and in Hawaii.