Sunoco Moves Closer to Substantial Retail Exit

DALLAS — Sunoco LP is nearing the end of the first leg in its journey to become a fuel supply-focused company.

"As you know, we are currently in the process of transforming Sunoco. Our roadmap starts with completing an efficient divestment of our company-operated stores," soon-to-be CEO Joe Kim, currently president and chief operating officer, said during the partnership's third-quarter earnings call on Nov. 8. 

The transformation also involves optimizing Sunoco's overhead. "We will rightsize our overhead for the going-forward business and, just as importantly, position us for efficient growth for the future," he said. 

Kim will take the reins as CEO when Bob Owens, current chief executive, steps down at the end of the year, as CSNews Online previously reported.

The first divestiture move consists of the sale of 1,108 convenience stores to 7-Eleven Inc. for $3.3 billion. These stores, which are part of an asset purchase agreement, are located in 18 states. 

In addition to the convenience stores, the transaction includes the associated trademarks and intellectual property of Sunoco's Laredo Taco Co. and Stripes brands.  

As part of the transaction, Dallas-based Sunoco will enter into a 15-year take-or-pay fuel supply agreement with a 7-Eleven subsidiary, under which Sunoco will supply approximately 2.2 billion gallons of fuel annually.

"Our team continues to work diligently toward closing. We believe the transaction is in the latter stages of the regulatory approval process with the FTC [Federal Trade Commission]," Kim said.

Sunoco is working toward a closing in the late fourth quarter of 2017, subject to completion of the regulatory process. However, according to Kim, there is a possibility that the deal will not close until early in the first quarter of 2018.

The second divestiture move involves the sale of company-operated stores in West Texas. Sunoco "is currently in sole negotiations with a quality buyer," Kim reported.

After completing due diligence and final negotiations, Sunoco estimates having a signed purchase agreement sometime in the fourth quarter of 2017, which will position the company to close on the deal in the first quarter of 2018. 

"Similar to our negotiations with 7-Eleven, we are balancing the trade-off of a higher purchase price with retained EBITDA through a fuel supply agreement," he said.

The combination of the 7-Eleven and West Texas packages will contribute about 2.5 billion gallons of stable fuel income for Sunoco.

"In total, we will distribute over 8 billion gallons of fuel annually," Kim said. "Scale is vital in this business and we believe we can leverage our scale for accretive growth in the future."

Q3 2017 Results

Sunoco has moved the operating results, assets and liabilities of its operations that are part of the retail divestitures into discontinued operations. Thus, its reported third-quarter results are based on continued operations, unless otherwise noted.

For the quarter, the partnership recorded net income of $138 million, including a $44-million impairment charge, compared to net income of $45 million a year ago. Total adjusted EBITDA was $199 million, a $10-million increase from 2016, mainly due to strong wholesale operations, according to current CEO Owens.

Looking at operational performance, total fuel volumes were 2 billion gallons, an increase of 1 percent vs. last year. Retail gallons were 656 million, an increase of 5 million gallons. Wholesale gallons, of 1.4 billion, also increased 1 percent from 2016.

Total weighted-average margin was 14.9 cents per gallon, compared to 15.6 cents in the comparable periods in 2016, due to lower margins in the retail segment. Broken out, wholesale margin was 10 cents a gallon — flat from a year ago — while retail margin per gallon was 25.3 cents compared to 27.5 cents in 2016's third quarter.

"Sunoco's wholesale business typically does not experience the same quarter-to-quarter fluctuation in gross-profit-cents-per-gallon margins as the retail business, which we view as favorable for our future," Owens explained.

Inside the stores, merchandise sales came in at $618 million, reflecting a 2-percent increase from the third quarter of 2016, with continued market share gains in packaged beverage, beer and restaurant sales, he said.

Merchandise gross profit margin of 32.1 percent was an improvement of 0.3 percent year over year. This third-quarter margin was consistent with the second quarter.

Turning to total retail, same-store gallons were down 2 percent and same-store merchandise sales decreased by 0.1 percent.

Sunoco's operations in Florida, according to Owens, were negatively impacted by Hurricane Irma. "That said, our Texas operations posted positive same-store trends during the quarter despite the impact of Hurricane Harvey," he noted.

Sunoco's roughly 140 retail stores in the oil-producing regions of Texas are primarily located in the Permian Basin, with the remainder in Eagle Ford, Owens said.

"The market has improved notably over the last six to 12 months," he added. "In the third quarter, same-store merchandise sales for those sites increased approximately 11 percent, getting progressively stronger throughout the quarter."

Same-store fuel gallons for those sites also increased 8 percent, with particular strength in diesel gallons, the chief executive explained.

Impact of Hurricanes

Owens thanked the Sunoco family for quickly mobilizing efforts to aid those affected by Hurricanes Harvey and Irma, getting the company back in business and providing needed fuel and merchandise in affected areas.

"Rarely do two storms hit within a short time period in markets in which we have high density," Owens said. "We are happy to report there were no employee injuries. Additionally, Sunoco partnered with leading community groups and vendors to provide assistance across affected communities."

According to the chief exec, the financial impact of the two hurricanes was modest. From a store perspective, Sunoco had roughly 150 stores that suffered that some form of minimal damage and only about 12 stores that require major repairs.

As of Sept. 30, Sunoco operated 1,346 convenience stores and retail fuel outlets along the East Coast, in the Southwest and in Hawaii. Third-party wholesale customers and sites totaled 7,898.

Dallas-based Energy Transfer Equity LP owns Sunoco's general partner and incentive distribution rights.