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Is Sunoco (SUN) a Buy Post Strategic Permian Basin JV?
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Last week, Sunoco LP (SUN - Free Report) entered into a joint venture (JV) with Energy Transfer LP (ET - Free Report) to consolidate their crude oil and produced water-gathering assets in the Permian, the most prolific basin in the United States. The JV, effective as of Jul 1, 2024, will immediately enhance the distributable cash flow per unit. This development is coupled with SUN’s stable business model and predictable fee-based cash flows, which suggests a promising outlook for the master limited partnership.
The critical question now facing investors is how to position themselves regarding the stock. Before addressing this, let's review some fundamental aspects of the leading motor fuel distributor.
The Permian JV
Sunoco will allocate all of its Permian crude oil gathering assets and operations to the JV, in which it has a 35.5% interest. Following the JV, the partnerships will collectively operate more than 5,000 miles of crude oil and water-gathering pipelines.
The crude oil and produced water gathering assets refer to the infrastructure and equipment used to collect, transport and sometimes initially process crude oil and produced water from production sites in the Permian Basin. The JV also includes more than 11 million barrels of crude oil storage capacity.
In a broader sense, the creation of the JV, which combines SUN and ET’s crude oil and produced water-gathering assets, indicates a strategic pooling of infrastructure and resources in the Permian Basin. This move aims to enhance operational efficiencies, reduce costs and potentially boost their market shares in the region. Consequently, this collaboration will improve services for producers, enabling better resource management and increasing profitability for both SUN and ET.
A "take-or-pay" contract, frequently utilized in the energy sector by entities such as Sunoco, mandates that the buyer commits to purchasing a minimum quantity of a product (such as fuel) from Sunoco within a designated timeframe. Should the buyer fail to meet this minimum, they are still obligated to make the payment.
On Apr 16, Sunoco revised its current take-or-pay fuel supply agreement with 7-Eleven, Inc. to include extra fuel gross profit. This revision ensures a consistent revenue stream for Sunoco, irrespective of fluctuations in demand, thereby enhancing financial stability and predictability for investors.
It can also be said that with its midstream operations comprising an extensive 10,000 miles of pipeline and more than 100 terminals, the partnership has limited exposure to volume and commodity price risks.
Lucrative NuStar Energy Acquisition & Distribution Yield
On May 3, Sunoco completed the $7.3 billion acquisition of NuStar Energy LP. With the acquisition of the leading independent liquids terminal and pipeline operator, SUN has diversified its operations and enhanced its credit profile. For more details, read our blog: Sunoco and NuStar Join Forces for a 7.3B All-Equity Merger.
SUN’s stable and lucrative business model enables it to reward unitholders with lucrative distribution yields. The partnership offers a solid distribution yield of 6.16%, higher than the 4.7% yield of the composite stocks belonging to the industry. Another prominent operator of midstream assets, Western Midstream Partners LP (WES - Free Report) , offers an even higher distribution yield of 8.3%.
Image Source: Zacks Investment Research
Premium Valuation Justified
Thus, the strong growth prospects and stable fee-based cash flows are justified in the stock’s premium valuation, indicating investor confidence.
The partnership's current trailing 12-month enterprise value/earnings before interest, tax, depreciation, and amortization (EV/EBITDA) ratio is 11.26, which is trading at a premium compared to the broader industry average of 10.06.
Image Source: Zacks Investment Research
The strong investor confidence is also reflected in unit prices, which jumped 35.1% in the past year.
Image Source: Zacks Investment Research
Last Word
Given that SUN's overall business outlook remains bullish and the stock fundamentals currently justify its premium valuation, it would be wise to buy it. Sunoco sports a Zacks Rank #1 (Strong Buy), at present. You can see the complete list of today’s Zacks #1 Rank stocks here.
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Is Sunoco (SUN) a Buy Post Strategic Permian Basin JV?
Last week, Sunoco LP (SUN - Free Report) entered into a joint venture (JV) with Energy Transfer LP (ET - Free Report) to consolidate their crude oil and produced water-gathering assets in the Permian, the most prolific basin in the United States. The JV, effective as of Jul 1, 2024, will immediately enhance the distributable cash flow per unit. This development is coupled with SUN’s stable business model and predictable fee-based cash flows, which suggests a promising outlook for the master limited partnership.
The critical question now facing investors is how to position themselves regarding the stock. Before addressing this, let's review some fundamental aspects of the leading motor fuel distributor.
The Permian JV
Sunoco will allocate all of its Permian crude oil gathering assets and operations to the JV, in which it has a 35.5% interest. Following the JV, the partnerships will collectively operate more than 5,000 miles of crude oil and water-gathering pipelines.
The crude oil and produced water gathering assets refer to the infrastructure and equipment used to collect, transport and sometimes initially process crude oil and produced water from production sites in the Permian Basin. The JV also includes more than 11 million barrels of crude oil storage capacity.
In a broader sense, the creation of the JV, which combines SUN and ET’s crude oil and produced water-gathering assets, indicates a strategic pooling of infrastructure and resources in the Permian Basin. This move aims to enhance operational efficiencies, reduce costs and potentially boost their market shares in the region. Consequently, this collaboration will improve services for producers, enabling better resource management and increasing profitability for both SUN and ET.
For more details, read our blog: Energy Transfer (ET - Free Report) Forms JV With Sunoco in Permian Basin.
Take-or-Pay Contracts
A "take-or-pay" contract, frequently utilized in the energy sector by entities such as Sunoco, mandates that the buyer commits to purchasing a minimum quantity of a product (such as fuel) from Sunoco within a designated timeframe. Should the buyer fail to meet this minimum, they are still obligated to make the payment.
On Apr 16, Sunoco revised its current take-or-pay fuel supply agreement with 7-Eleven, Inc. to include extra fuel gross profit. This revision ensures a consistent revenue stream for Sunoco, irrespective of fluctuations in demand, thereby enhancing financial stability and predictability for investors.
It can also be said that with its midstream operations comprising an extensive 10,000 miles of pipeline and more than 100 terminals, the partnership has limited exposure to volume and commodity price risks.
Lucrative NuStar Energy Acquisition & Distribution Yield
On May 3, Sunoco completed the $7.3 billion acquisition of NuStar Energy LP. With the acquisition of the leading independent liquids terminal and pipeline operator, SUN has diversified its operations and enhanced its credit profile. For more details, read our blog: Sunoco and NuStar Join Forces for a 7.3B All-Equity Merger.
SUN’s stable and lucrative business model enables it to reward unitholders with lucrative distribution yields. The partnership offers a solid distribution yield of 6.16%, higher than the 4.7% yield of the composite stocks belonging to the industry. Another prominent operator of midstream assets, Western Midstream Partners LP (WES - Free Report) , offers an even higher distribution yield of 8.3%.
Premium Valuation Justified
Thus, the strong growth prospects and stable fee-based cash flows are justified in the stock’s premium valuation, indicating investor confidence.
The partnership's current trailing 12-month enterprise value/earnings before interest, tax, depreciation, and amortization (EV/EBITDA) ratio is 11.26, which is trading at a premium compared to the broader industry average of 10.06.
The strong investor confidence is also reflected in unit prices, which jumped 35.1% in the past year.
Last Word
Given that SUN's overall business outlook remains bullish and the stock fundamentals currently justify its premium valuation, it would be wise to buy it. Sunoco sports a Zacks Rank #1 (Strong Buy), at present. You can see the complete list of today’s Zacks #1 Rank stocks here.