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What’s behind Sunoco’s Rise This Year?

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Dec. 4 2020, Updated 10:53 a.m. ET

Sunoco’s rise

Sunoco (SUN) has risen nearly 13% so far in 2017. In comparison, the Alerian MLP Index has fallen nearly 15%. Energy Transfer Equity (ETE)—Sunoco’s parent—owns Sunoco’s GP (general partner) interests and IDRs (incentive distribution rights). Sunoco operates retail fuel sites and convenience stores and distributes motor fuel to convenience stores, dealers, commercial customers, and distributors.

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Deal with 7-Eleven

In April 2017, Sunoco announced the sale of its 1,110 convenience stores to 7-Eleven in a $3.3 billion deal. According to Sunoco president and chief operating officer Joe Kim, the transaction is currently in the “latter stages of the regulatory approval process with the FTC” (Federal Trade Commission). The company has expressed that the closing of the transaction could being delayed from 4Q17 to 1Q18.

Sunoco has also entered into a long-term take-or-pay agreement with 7-Eleven to supply 2.2 billion gallons of fuel per year. Wholesale fuel volumes sold to 7-Eleven will account for ~29% of Sunoco’s total wholesale volumes. Sunoco has been struggling with high leverage for quite some time. It plans to use the proceeds from this transaction for debt repayment to bring down its leverage. Additionally, the supply agreement with 7-Eleven will likely stabilize Sunoco’s earnings. As the above graph shows, the sale announcement resulted in a surge in Sunoco’s stock price.

Ongoing measures to reduce leverage

After the sale to 7-Eleven, Sunoco launched sales processes for its remaining company-operated convenience stores in North and West Texas, Oklahoma, and New Mexico. Sunoco’s debt-to-adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) ratio was 5.6x at the end of 3Q17, compared with 6.5x at the end of 2016.

Sunoco’s measures to strengthen its balance sheet throughout the year were well received by investors, resulting in stock gains. Next, we’ll analyze the factors driving Sanchez Midstream Partners (SNMP) stock in 2017.

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