Sunoco Sale Raises Retail Reservations
Published in CSP Daily News
New owner also new to convenience retailing
DALLAS & PHILADELPHIA -- The CEO of the company that announced its purchase of Sunoco Inc. yesterday openly admits that convenience retailing was not on the company's mind as it looked at ways to grow.
"Everyone knows that we would not have targeted a retail business as a strategic move for the company," Kelcy Warren, Energy Transfer Partners LP's chief executive officer and chairman, said on a conference call yesterday. But with Sunoco's other assets being a strategic fit, ETP finds itself ready to diversify and take advantage of Sunoco's retailing strengths.
Retail "is part of the overall package of what we're buying here. We believe it's extremely well run. We think the cash flows are very sustainable. And we believe it's a very good business," Warren told investors and analysts. "We're happy to have it and we're committed to the business. We'll continue to grow and manage it with the people who have been doing so well with it for quite a while."
ETP and Sunoco have entered into a definitive merger agreement whereby ETP will acquire Sunoco in a unit and cash transaction valued at $50.13 per share, or a total consideration of approximately $5.3 billion, based on ETP's closing price on April 27, 2012, as reported in a Morgan Keegan/CSP Daily News Flash yesterday. The combined companies will create one of the largest and most diversified energy partnerships in the country, according to the companies, by expanding ETP's geographic footprint and strengthening its presence in the transportation, terminalling and logistics of crude oil, NGLs and refined products.
To that end, "the Sunoco purchase is a stroke of genius for ETP," said Ken Shriber, managing director of Chappaqua, N.Y.-based Petroleum Equity Group, and a longtime industry-watcher, "as it now provides them with exposure to oil and refined liquids. You also have to give credit to Sunoco in pulling this off, as they continue to be saddled with significant closed and/or underperforming refining assets which go along with the deal."
Shriber predicted in a CSP Daily News guest editorial in February that Sunoco was ripe for acquisition (see Related Content below). As he said yesterday, "While I was fairly comfortable with my prophecy, and while a sale or merger was something that had to eventually occur, what I did not foresee is that a deal would be announced so soon."
He added that as consolidations in the wholesale and retail fuels sector continue to occur, "Sunoco brings forward its share with a large chain of retail stores (4,900 convenience stores). The added asset slate of logistics businesses and infrastructure that the Sunoco package brought to the table should have been irresistible to many suitors. The fact that ETP acted so quickly tells me that they had the vision and expertise to act expeditiously and make it happen for both parties before other potential buyers inserted themselves and complicated their deal."
The acquisition creates "one of largest and most diversified energy partnerships in the United States," said Martin Salinas Jr., CFO at ETP.
"From a strategic perspective, one area we felt we needed to address was the business diversification so that we were not overly subjected to natural-gas basis risk," said Salinas. "In addition, our customers are demanding more NGL (natural gas liquids) capabilities. We believe this opportunity accelerates our diversification strategy while meeting customers' needs."
Sunoco's exiting of the refining business created the optimal timing for the transaction, said Salinas, who added that ETP supports Sunoco's existing plans for exiting the refining business and plans for a recently announced refining joint venture under discussion with The Carlyle Group.
Key management and employees at Sunoco and Sunoco Logistics will stay on board, Salinas said, with minimal integration risks because of the limited operational overlaps between the companies. Sunoco Logistics will remain a separate, publically traded MLP (master limited partnership) and stay in place to minimize business disruptions.
"As a result of diversification, we will have repositioned ourselves from being an almost pure-play natural-gas pipeline company to a much broader, more diversified enterprise with a well balanced business mix of cash flows, with much of it underpinned by feed-base, long-term contracts, thereby reducing exposure to commodity price and basis differential volatility," said Salinas. It also provides ETP with the ability to convert underutilized natural-gas pipelines to move crude and refined product through Sunoco Logistics' network, and tap into ETP's experience in NGLs to enter the Marcellus Shale development.
Brian MacDonald, president and CEO of Sunoco, highlighted the company's transformation over the past four years from a large refiner with a chemicals and coke business, to a leaner logistics-and retail-focused operator.
"Our retail business benefits from strong returns, stable cash-flows, iconic brand recognition and owned real estate in key locations throughout the East Coast through the Midwest and Southeast," said MacDonald. "Sunoco Logistics offers excellent assets in desirable locations, provides steady rateable cash-flows and has significant growth potential within the NGL and oil industries. This deal will improve the ability of Sunoco Logistics and the retail business to deliver on their full potential."
But what of the retail assets? Do they really fit ETP's mode of operation?
(See story about ETP in this issue of CSP Daily News.)
"There are other folks who have taken certain parts of a retail gasoline business and put them in an MLP structure," said MacDonald, who noted that he and other Sunoco executives--notably, Mike Hennigan, president and CEO of Sunoco Logistics, and Bob Owens, Sunoco senior vice president of retail marketing--have been examining those options.
Sunoco's logistics and retail businesses will continue to maintain headquarters in the Philadelphia area consistent with their current operating presence. In addition, under the merger agreement, Sunoco will continue its plans for exiting its refining business as previously announced, as well as continue its plans for the proposed refinery joint venture being discussed by Sunoco and The Carlyle Group.