Executive Summary / Key Takeaways

• Sunoco LP is strategically transforming into a more diversified energy infrastructure and fuel distribution MLP through significant, accretive acquisitions, notably the $7.3 billion NuStar Energy transaction, which has substantially expanded its midstream footprint.
• The company's portfolio is now balanced across Fuel Distribution, Pipeline Systems, and Terminals, providing enhanced stability and resilience across various market conditions, including commodity volatility and inflationary pressures.
• Recent financial results demonstrate strong operational performance, with Q1 2025 Adjusted EBITDA reaching $458 million, driven by contributions from acquired assets and effective profit optimization strategies in Fuel Distribution.
• Management is confident in achieving its full-year 2025 Adjusted EBITDA guidance of $1.9 billion to $1.95 billion, underpinned by synergy realization from acquisitions and continued strength across all segments.
• The Partnership is committed to returning capital to unitholders, targeting an annual distribution growth rate of at least 5% for 2025, supported by expected continued growth in distributable cash flow per common unit.

A Portfolio Reimagined: Building Resilience Through Strategic Expansion

Sunoco LP, a Delaware master limited partnership, has long been a significant player in the energy sector, primarily focused on the distribution of motor fuels across a vast network spanning over 40 U.S. states, Puerto Rico, Europe, and Mexico. Historically rooted in fuel distribution, the company has embarked on a transformative journey over the past few years, strategically evolving its business model to become a more diversified energy infrastructure entity. This evolution is central to the investment thesis today, aiming to build a more stable, resilient, and growth-oriented enterprise capable of navigating dynamic market conditions.

The core of Sunoco's business now rests on three reportable segments: Fuel Distribution, Pipeline Systems, and Terminals. The Fuel Distribution segment supplies motor fuel to a wide array of customers, including independent dealers, distributors, and commercial accounts, complemented by income from property leases and retail operations in specific markets. The Pipeline Systems segment encompasses an extensive network of approximately 14,000 miles of pipelines transporting refined products, crude oil, and ammonia, integrated with certain terminal and storage assets. The Terminals segment comprises storage facilities offering services like tank storage, throughput, blending, and transmix processing, including a growing international presence.

This current structure is a direct result of recent, impactful strategic initiatives. Key among these was the $7.3 billion acquisition of NuStar Energy (NS), which closed in May 2024. This landmark transaction significantly bolstered Sunoco's midstream capabilities, adding substantial pipeline and terminal assets. Complementing this, the formation of the ET-S Permian joint venture with Energy Transfer (ET) in July 2024 combined significant crude oil and produced water gathering assets, enhancing operational scale and commercial flexibility in a key producing basin. These moves, alongside smaller, targeted acquisitions like the Zenith European terminals in early 2024 and the TanQuid terminals in Germany and Poland (expected to close in the second half of 2025), and the announced acquisition of Parkland Corporation (expected second half 2025), underscore a deliberate strategy to diversify income streams, enhance stability, and create a more balanced portfolio less susceptible to the fluctuations inherent in a pure distribution model. Management explicitly states the goal is to achieve income diversification and a balanced portfolio over the long run.

In the competitive landscape, Sunoco operates alongside larger, integrated energy giants like Marathon Petroleum (MPC), Phillips 66 (PSX), Valero Energy (VLO), and Chevron Corporation (CVX), as well as other fuel distributors and midstream operators. While competitors like MPC, PSX, VLO, and CVX often possess advantages in refining scale and integrated supply chains, leading to potentially lower operating costs per barrel or faster processing speeds in some areas, Sunoco carves out its niche through its extensive distribution network, customer-focused approach, and strategic acquisitions that enhance its footprint in specific regions and asset types. Sunoco's strategy of vertical integration, particularly between its fuel distribution and terminaling assets, is seen as a key advantage in a competitive market with many participants. The company's ability to acquire quality assets at attractive valuations and subsequently optimize their utilization and capture synergies is a core part of its competitive response. Indirect competition from renewable energy sources and electric vehicles also presents a long-term dynamic that influences demand for traditional refined products.

Sunoco's technological differentiation appears to lie less in proprietary refining processes (where some larger competitors may have an edge) and more in operational efficiency, network optimization, and specific retail technology. The company's customer-focused systems, including its retail point-of-sale technology, are cited as offering tangible benefits like faster processing speeds, which enhance the customer experience and contribute to loyalty. While specific quantitative metrics on the impact of all operational technologies are not detailed, the strategic intent is clear: leverage integrated assets and efficient systems to be a low-cost operator and execute on commercial opportunities. Management's focus on expense discipline, even amidst inflationary pressures, further highlights the importance of operational efficiency as a competitive lever. Information regarding research and development initiatives is not extensively detailed, suggesting the primary focus on technological advancement is currently centered on optimizing existing infrastructure and integrating acquired systems rather than developing fundamentally new energy technologies.

Performance Reflecting Strategic Shifts and Operational Strength

The impact of Sunoco's strategic transformation is increasingly visible in its financial performance. For the three months ended March 31, 2025, Sunoco reported Net Income of $207 million, a decrease compared to $230 million in the same period last year. This change was primarily influenced by increases in operating expenses, depreciation, amortization, and accretion, as well as higher interest expense, largely attributable to the integration of acquired assets and associated debt.

However, a clearer picture of the underlying operational performance emerges from the Adjusted EBITDA figures. Consolidated Adjusted EBITDA for Q1 2025 was $458 million, a significant increase from $242 million in Q1 2024. This substantial growth was primarily driven by the increased contributions from the Pipeline Systems and Terminals segments, reflecting the impact of the NuStar and Zenith European terminals acquisitions, as well as the formation of the ET-S Permian joint venture. Increased Adjusted EBITDA related to unconsolidated affiliates, primarily due to ET-S Permian, also contributed meaningfully. These gains more than offset the increases in operating costs associated with the larger asset base.

Looking at segment performance in Q1 2025:

• Fuel Distribution: Reported Segment Adjusted EBITDA of $220 million, a slight increase from $218 million in Q1 2024. Volumes were 2,087 million gallons, flat year-over-year despite the divestiture of West Texas assets in April 2024, which management attributes to volume increases from investment and profit optimization, noting that this volume growth continues to beat industry benchmarks. The motor fuel profit per gallon was $0.1105, up from $0.1009 in Q1 2024, benefiting from elevated break evens and commodity market volatility that supported profit optimization strategies.
• Pipeline Systems: Reported Segment Adjusted EBITDA of $172 million, a dramatic increase from $0 million in Q1 2024. This segment's performance in 2025 reflects the full integration of assets acquired through the NuStar transaction and the contribution from the ET-S Permian joint venture. Throughput was 1,258 thousand barrels per day, with management noting volume increases due to recently acquired assets, despite some reliability challenges at feeding refineries.
• Terminals: Reported Segment Adjusted EBITDA of $66 million, a substantial increase from $24 million in Q1 2024. This growth was primarily driven by the acquisitions of NuStar and Zenith European terminals. Throughput was 620 thousand barrels per day, up significantly from 418 thousand barrels per day in Q1 2024, also reflecting the impact of acquired assets.

The balance sheet reflects the recent M&A activity. As of March 31, 2025, total debt was $7.67 billion, up from $7.49 billion at December 31, 2024, primarily due to the issuance of $1 billion in senior notes in March 2025, used partly to repay existing debt and Credit Facility borrowings. This offering extended the debt maturity profile and enhanced financial flexibility. Cash and cash equivalents stood at $172 million, with $1.44 billion available under the $1.5 billion Credit Facility. The Partnership was in compliance with all financial covenants. Management highlighted achieving their long-term leverage target of 4.0x within five months of the NuStar close, ahead of their initial 12-18 month target, underscoring their commitment to balance sheet strength.

Outlook: Sustained Growth and Unitholder Returns

Sunoco's management expresses strong confidence in the company's future, projecting continued growth and value creation. They remain on track to achieve their full-year 2025 financial guidance, which includes an Adjusted EBITDA range of $1.9 billion to $1.95 billion. This outlook is underpinned by the expected realization of significant synergies from the NuStar acquisition ($125 million in 2025, targeting a $200 million annual run rate in 2026) and the ET-S Permian joint venture, as well as the continued strong performance anticipated across all three segments.

The strategic growth pipeline remains active. The pending acquisitions of TanQuid and Parkland Corporation (PKI) are expected to further expand Sunoco's geographic reach and asset base, contributing to future earnings and diversification. Management views these opportunities as meeting their criteria for stable cash flows, synergies, growth potential, and attractive valuations.

Capital allocation priorities for 2025 include funding growth capital expenditures (at least $400 million expected, including joint ventures) and maintenance capital ($150 million expected, including joint ventures), servicing debt, and returning capital to unitholders. The Partnership has explicitly targeted an annual distribution growth rate of at least 5% for 2025, with plans to announce future increases on a quarterly basis. This commitment is supported by a track record of consecutive years of growth in distributable cash flow per common unit, which management expects to continue, providing a clear path for sustained distribution increases while maintaining healthy coverage ratios.

The outlook is not without risks. General economic conditions, including potential inflation or recession, could impact fuel demand and operating costs. Regulatory changes, particularly concerning FERC tariff rates for pipelines and potential shifts in energy policy impacting refined products demand, pose uncertainties. The integration of large acquisitions like Parkland carries execution risk, and litigation related to such transactions could incur substantial costs. Future debt levels, especially following the Parkland acquisition which includes assumed debt, could pressure financial flexibility. While management acknowledges these risks, they emphasize the resilience of their diversified business model, their proven ability to manage expenses in challenging environments, and their strategic positioning in critical energy infrastructure as mitigating factors.

Conclusion

Sunoco LP has successfully navigated a period of significant strategic transformation, emerging as a more diversified and resilient energy MLP. The integration of the NuStar assets and the formation of the ET-S Permian joint venture have fundamentally reshaped its portfolio, creating a balanced mix of Fuel Distribution, Pipeline Systems, and Terminals that provides enhanced stability and growth potential. Recent financial performance, particularly the substantial increase in Adjusted EBITDA, demonstrates the initial benefits of these strategic moves and the operational strength across its segments.

With a clear growth strategy focused on accretive acquisitions and organic investments, a commitment to maintaining a strong balance sheet, and a stated target for meaningful distribution growth, Sunoco appears well-positioned to deliver value to unitholders. While macro risks and integration challenges persist, the company's foundation in critical energy infrastructure and its proven ability to execute in volatile markets underpin the investment thesis. The outlook for continued growth in earnings and cash flow supports the potential for sustained returns, making Sunoco LP a compelling consideration for investors seeking exposure to a transforming energy infrastructure story.