SUNOCO LP

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 3/5

Sunoco LP is a master limited partnership, primarily engaged in the distribution and sale of motor fuel, with a focus on retail locations and wholesale distribution across the U.S.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Sunoco LP operates in the fuel distribution industry, primarily selling motor fuel, but also merchandise at its retail locations. It generates revenues through a mix of fixed and variable pricing models that have been exposed to volatile market prices.

Business Overview:

Sunoco LP is primarily engaged in the wholesale and retail distribution of motor fuel, with a significant presence in the eastern U.S. The Partnership does not engage in exploration or production. Here’s a breakdown of its business:

Fuel Distribution and Marketing: The majority of Sunoco’s revenue comes from the sale of motor fuel to both its own branded and to independent dealers. Sunoco markets and distributes motor fuel through a network of approximately 45 branded fuel outlets in the United States.
Retail Operations: Sunoco operates retail locations that sell fuel, convenience items, and related products. The brand’s revenue model includes retail sales, but it is significantly affected by volatile commodity prices which can make revenue streams unstable.
Terminal Operations: Sunoco also maintains some terminal locations which allow them to store petroleum products.
Geographic Reach: The majority of Sunoco’s operations are focused along the East Coast of the U.S. and to a lesser degree the South and Midwest regions.

Sunoco’s profitability is influenced by factors such as the spread between wholesale and retail prices, transportation expenses, and operational costs. It operates under a high cost, low margin environment.

Industry Trends and Competitive Landscape:

The petroleum distribution industry is characterized by high competition and volatility, with many players vying for market share. Here are key trends and challenges:

Consolidation: The industry is experiencing consolidation with fewer players commanding larger market shares.
Price Volatility: Fluctuations in crude oil prices directly impact the cost of fuel, which can be passed onto customers, but only with lag time and often not entirely.
Evolving Consumer Preferences: Consumer preferences are shifting with some movement away from the traditional gasoline vehicles to hybrid and EV vehicles.
Regulations: The industry faces increasing environmental regulations and scrutiny.
Competition: The Partnership competes with vertically integrated oil companies, other refiners, and independent distributors and marketers for supply, services, and customer markets.
Seasonality: The Partnership’s operations are impacted by seasonal factors (particularly weather), which affect customer demand for motor fuels and related products. Weather also impacts supply through disruption due to natural disasters.
Supply: Disruptions to the supply chain, both directly and indirectly, can impact operations.
Government Regulation and Legislation: These laws may be complex and could require expensive equipment or facility modifications.

Recent news suggests that the company is making strides towards expanding beyond just selling fuel, and is exploring more innovative initiatives, such as electric charging stations.

Financial Analysis:

The most recent 10-Q report for the quarter ended September 30, 2023, shows the following:

Revenue: $6.3 billion for the three months ended September 30, 2023, compared to $7.2 billion for the same quarter the previous year. The decrease was primarily attributable to lower commodity prices.
Net Income: Net income for the three months was $333 million, compared to $500 million for the three months ended September 30, 2022.
Adjusted EBITDA: For the three months ended September 30, 2023, Adjusted EBITDA was $354 million, compared to $413 million for the same period last year.
Operating Income: Operating income was $428 million for the three months ended September 30, 2023.
Shareholder Equity: Total shareholder equity for September 30, 2023 was reported at $4,188 million.
Long-term Debt: The company’s long-term debt was valued at $3,073 million at September 30, 2023.
Cash Flow: The partnership had $351 million in cash from operations for 9 months ended 2023, and $457 million in cash flow from operations in year ending 2022.

The most recent filings highlight that Sunoco’s financial performance is subject to the volatility of the commodities markets.

Key Financial Metrics & Observations:

ROIC Trends: The company’s return on invested capital (ROIC) is closely tied to oil prices, and recent weakness in the petroleum market have made returns lower. However, the company did not report its ROIC on the latest calls.
Margins: Operating margins are subject to both price fluctuations in crude oil and the ability of the company to pass increased costs onto its consumers, which can be difficult during times of low demand and heightened competition.
Debt: Although the company has significant debt, they have enough capital and flexibility to manage it.

Moat Analysis:

Sunoco’s moat can be described as narrow, as opposed to wide or non existent.

Brand Recognition: Sunoco enjoys some advantage from brand recognition, primarily on the east coast, where it’s a well established player. However, as brands like Shell and Exxon are widely recognized, its brand doesn’t offer a massive moat.
Established Distribution Network: The existing distribution network of over 45 distribution centers in the US is a big advantage in this sector. However, competition is fierce and they don’t have too much control over this aspect of the business.
Regulatory approval and locations: While most fuel stations are in competitive areas, locations at airports, military bases, and national parks create some barriers to entry, creating a relatively narrow moat.
Scale advantages: Due to its size and distribution channels, it can sometimes achieve economies of scale. But, other larger companies like Marathon Petroleum and Phillips 66 have economies of scale that are equal or better.

Based on the above, I would place Sunoco at a 2/5 for moat strength.

Risks to the Moat and Resilience:

Commodity Price Risk: A large percentage of the company’s revenue is dependent on sales of refined fuels. This subjects the Partnership to significant risks of price fluctuations in refined products. Significant drops in price can severely and negatively impact the company.

As noted previously, the company is directly affected by prices of commodities like oil and gas, which can be extremely volatile.

Environmental Regulations: New EPA regulations may require substantial changes to current business operations and might cause additional expenses for the company. It is also subject to a lot of litigation, which would be costly and could take time.
Competition: The fuel distribution and marketing industry is extremely competitive, with both large and smaller players vying for market share and attempting to compete with price, location, and services.
Technological Disruption: Changes in technologies related to transportation and vehicles, such as the rise of electric vehicles, may significantly reduce demand for gasoline and other fuel products.
Uncertainty from Acquisitions: The Partnership has engaged in several acquisitions. Success of these and proper integration are not always guaranteed.

Despite these risks, the core business of Sunoco LP is quite resilient. The Partnership’s focus on retail convenience and a stable gasoline demand across its existing locations may help mitigate risk, and their growing network of terminals, which it owns in the US.

Although the company has faced challenges, they have been able to show resilience over their history, highlighting a strong long term business strategy.

Understandability:

I would rate this a 3/5 for understandability. While the general business is easy to understand—transporting and selling fuel—the complexities of its financial structure, regulations, and the ever-present volatility of commodity prices add an extra layer of difficulty that could be hard to evaluate for non professional investors. Additionally, all the nuances in the transportation, refining, distribution sectors require further research. It is also quite difficult to understand the different legal requirements for the business.

Balance Sheet Health:

Based on a review of the latest financial statements, I rate Sunoco’s balance sheet health as 3/5. While total assets are higher than liabilities and debt is reasonable, it is still high considering their ROIC is not too high in the recent few years, making it more difficult for the company to pay off or restructure its debt in the case of a big emergency. Also, their profitability is volatile as its driven from commodity prices.

Due to high debt levels and exposure to commodity price fluctuations, its balance sheet isn’t as healthy as one would have liked.

In Summary, while Sunoco LP has some inherent advantages, its profitability and growth potential are tied to the volatile energy markets, and this along with a complex and volatile legal structure in the US make the company a very risky pick. A thorough analysis on your own is advisable before proceeding with any decision.