Sunoco (SUN) rose 12.7% on Thursday, December 22, 2016, after it announced amendments to its credit facilities and rating upgrades. Under the new terms, SUN’s maximum leverage ratio covenant will rise to 6.75x from 4Q16 to 4Q17. The ratio could fall to 5.50x by the end of March 2019. The maximum senior secured leverage ratio and minimum interest coverage ratio covenants have been relaxed.
Bad liquidity and its balance sheet position has remained a major concern for Sunoco, which is involved in retail and wholesale marketing and the distribution of refined products. The MLP reported a net debt-to-adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) of 5.97x at the end of 3Q16.
Moody’s recently downgraded Sunoco’s corporate family rating to Ba3. The amendment to SUN’s credit facility must be a relief for its investors.
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Sunoco is still trading 33.0% below levels at the start of 2016. The MLP touched its multiyear low at the end of November. The Alerian MLP ETF (AMLP), which is comprised of 26 midstream energy MLPs, has risen 5.0% in 2016. SUN’s GP (general partner) Energy Transfer Equity (ETE) has risen 40.4% during the same time period.
Currently, SUN is trading 12.8% below its 200-day moving average. SUN’s weak YTD performance could be attributed to its high leverage and falling earnings in recent quarters due to lower fuel margins resulting from lower commodity prices.
Credit Suisse and FBR & Co. upgraded Sunoco from a “hold” to a “buy” following the credit facility amendment announcement. According to FBR’s recent target price estimate of $32, Sunoco still has an upside potential of 21.0% from its current price levels.
In the next part of this series, we’ll take a look at Sunoco’s current valuation.