Business Overview and History

Sunoco LP, originally established as Susser Petroleum Partners LP in 2012, changed its name to Sunoco LP in 2015. The partnership has grown rapidly through strategic acquisitions and organic expansion, establishing a footprint that now spans over 40 U.S. states, Puerto Rico, Europe, and Mexico. Sunoco LP has become the largest independent distributor of motor fuel in North America.

In 2014, Sunoco LP significantly expanded its business through the acquisition of Susser Holdings Corporation, which added over 630 convenience stores and fuel outlets to the company's operations, strengthening its presence in the Southwest United States. The company faced challenges in 2017 when it experienced a decline in wholesale motor fuel distribution volumes and profitability. However, Sunoco LP responded by implementing cost reduction initiatives and optimizing its retail operations, which helped the company return to profitability in subsequent years.

In 2019, Sunoco LP further diversified its asset base by acquiring 16 refined product terminals from Zenith Energy, expanding its midstream energy infrastructure assets. This acquisition complemented Sunoco LP's downstream fuel distribution operations and diversified the company's revenue streams, although the integration of the Zenith assets presented operational challenges that Sunoco LP had to navigate.

Sunoco's operations are divided into three reportable segments: Fuel Distribution, Pipeline Systems, and Terminals. The Fuel Distribution segment supplies motor fuel to independently-operated dealer stations, distributors, commission agents, and other consumers, while the Pipeline Systems and Terminals segments provide critical infrastructure services for the storage, handling, and transportation of refined products, crude oil, and specialty chemicals.

Financial Strength and Resilience

Sunoco's financial performance has been consistently strong, with the company reporting annual net income of $311 million and revenue of $23.07 billion in 2023. The partnership's operating cash flow for the same period was $600 million, while free cash flow reached $385 million, demonstrating its robust cash generation capabilities.

For the third quarter of 2024, Sunoco reported revenue of $5.75 billion, a 9.0% decrease from $6.32 billion in Q3 2023. Net income for Q3 2024 was $2 million, a significant decrease from $272 million in Q3 2023, primarily due to unfavorable inventory valuation adjustments, increased depreciation and amortization, and higher interest expense, partially offset by improved operational performance. Operating cash flow for Q3 2024 was $206 million, with free cash flow of $105 million.

Sunoco's balance sheet remains solid, with a net debt position of $3.55 billion as of the end of 2023. The partnership's leverage ratio, as measured by net debt to adjusted EBITDA, stood at 4.0x, well within its targeted range of 3.5x to 4.5x. This financial discipline has afforded Sunoco the flexibility to pursue growth opportunities while maintaining a strong credit profile.

Operational Excellence and Growth Initiatives

Sunoco's operational prowess is evident in its segment-level performance. In the first nine months of 2024, the Fuel Distribution segment reported adjusted EBITDA of $716 million, while the Pipeline Systems and Terminals segments generated $189 million and $113 million, respectively. This diversified earnings stream has contributed to the partnership's overall resilience and ability to navigate industry headwinds.

The Fuel Distribution segment, which is Sunoco's largest, sold 6.43 million gallons of motor fuel in the first nine months of 2024, with a profit of 11.9 cents per gallon. The segment's fuel profit totaled $670 million, while non-fuel profit reached $118 million, and lease profit was $97 million for the same period.

The Pipeline Systems segment reported throughput of 1.17 million barrels per day for both the three and nine months ended September 30, 2024. The Terminals segment saw throughput of 694,000 barrels per day in Q3 2024 and 581,000 barrels per day for the first nine months of 2024.

Looking ahead, Sunoco remains committed to growth, with a robust pipeline of organic and inorganic opportunities. The company's 2024 capital expenditure budget includes $120 million for maintenance and at least $300 million for growth initiatives, focusing on expanding its midstream infrastructure and enhancing its fuel distribution capabilities.

The integration of the NuStar acquisition is progressing well, with Sunoco on track to deliver on its targeted $125 million in synergies by 2025 and $200 million by 2026. These synergies, combined with the company's strong operational execution, are expected to drive further growth and value creation for Sunoco's unitholders.

Outlook and Risks

Sunoco's outlook remains positive, with the company recently reiterating its confidence in meeting its 2024 adjusted EBITDA guidance. The partnership delivered record third quarter adjusted EBITDA of $470 million in 2024, excluding $14 million of one-time transaction expenses. Sunoco's third quarter distributable cash flow adjusted was $349 million, yielding a current quarter coverage ratio of 2.3x and a trailing 12-month ratio of 1.9x.

For 2025, Sunoco plans to provide formal guidance and business outlook in their investor presentation in December 2024. The company has previewed a few key themes, including strong outlooks for all three business segments, expected delivery of NuStar acquisition synergies, anticipation of another record year in 2025, and plans to continue being a growth company with increased distributions while maintaining strong coverage and leverage ratios.

The partnership's diversified business model, exposure to stable and growing end-markets, and disciplined approach to capital allocation have positioned it well to navigate industry challenges. The fuel distribution and midstream energy infrastructure industries have seen steady growth, with a 5-year CAGR of 3.2% for the fuel distribution segment and 4.5% for the midstream segment.

However, Sunoco is not without its risks. The midstream industry remains subject to regulatory changes, commodity price volatility, and competition from alternative energy sources. Additionally, the partnership's reliance on a limited number of large customers and the potential for disruptions in its supply chain or transportation network could pose challenges.

Financials

Sunoco LP has demonstrated strong financial performance, as evidenced by its 2023 results. The company reported annual net income of $311 million and revenue of $23.07 billion. Operating cash flow for the year was $600 million, while free cash flow reached $385 million. These figures highlight Sunoco's ability to generate substantial cash flow from its operations.

In the most recent quarter (Q3 2024), Sunoco reported revenue of $5.75 billion, net income of $2 million, operating cash flow of $206 million, and free cash flow of $105 million. The year-over-year revenue decrease of 9.0% and the significant drop in net income from $272 million in Q3 2023 were primarily attributed to unfavorable inventory valuation adjustments, increased depreciation and amortization, and higher interest expense, partially offset by improved operational performance.

Liquidity

Sunoco LP maintains a solid liquidity position, which is crucial for its ongoing operations and growth initiatives. The partnership's net debt position stood at $3.55 billion at the end of 2023, with a leverage ratio (net debt to adjusted EBITDA) of 4.0x. This ratio falls within Sunoco's targeted range of 3.5x to 4.5x, demonstrating the company's commitment to maintaining a balanced financial profile.

As of December 31, 2023, Sunoco reported cash and cash equivalents of $29 million. The company's debt-to-equity ratio was 3.36, with a current ratio of 1.41 and a quick ratio of 0.76. Sunoco has access to a $1.5 billion revolving credit facility, of which $1.42 billion was available as of September 30, 2024. This strong liquidity position provides Sunoco with the flexibility to pursue growth opportunities and weather potential market uncertainties.

Conclusion

Sunoco LP has demonstrated its ability to thrive in the dynamic midstream energy landscape. With its strategic acquisitions, operational excellence, and financial discipline, the partnership has emerged as a formidable player in the industry, poised for continued growth and value creation. As Sunoco navigates the evolving market conditions, its diversified business model and proven track record of execution provide a solid foundation for long-term success. The company's commitment to growth, synergy realization from recent acquisitions, and focus on maintaining strong financial metrics position it well for future performance and unitholder value creation.