Can Adding Some Sun(oco) Transfer More Energy into Your Portfolio?
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
When I saw the alert on Monday morning that Energy Transfer Partners (NYSE: ETP) was buying Sunoco (NYSE: SUN) I thought they couldn't be talking about the same Sunoco branded retail business I pass by on a daily basis. The first question that popped into my mind was what would a natural gas pipeline company want with a low margin gas station business? However, as I looked into the deal I saw that there was more to Sunoco than just gas stations. But will it be enough to transfer more energy into your portfolio?
When the deal was announced I was surprised that even with a 23% premium, Sunoco was only being valued at $5.3 billion. For a brand that continues to build its awareness each and every day through their nearly 5,000 retail locations, I thought it would have been worth a whole lot more. However, with core businesses in the low margin Refining and Marketing industries, it's no wonder why it's valued so low. In the deal, Energy Transfer is paying a combination of units and cash to acquire the branded retail stations, as well as their incentive distribution rights and 32.4% stake in Sunoco Logistics Partners (NYSE: SXL). Sunoco also owns two legacy refineries, one of which is currently idled and the other is potentially going to be sold into a joint venture with the Carlyle group or idled as well.
What Energy Transfer is really buying are the pipeline and storage assets via Sunoco Logistics as they'll be acquiring ownership interests in 2,500 miles of refined products pipelines, 5,400 miles of crude oil pipelines and 42 million barrels of refined products and crude oil terminal capacity. Energy Transfer currently has next to no exposure to the growing domestic oil and natural gas liquids storage and transportation segments, so these assets provide very nice diversification benefits. These assets are a nice addition to the portfolio and will give them the diversity and scale to compete with a company like Enterprise Products (NYSE: EPD) and their 5,500 miles of refined products pipelines, 6,000 miles of crude oil pipelines, and 190 million barrels of NGL, crude oil and refined products storage capacity.
As natural gas prices continue to drop to multi-year lows, having exposure to oil is necessary going forward. A potential future benefit lies in the fact that a bulk of the related assets being acquired are in the Marcellus and Utica Shale areas giving them a nice foothold in a key growth region. This adds to Energy Transfer's platform in the area and provides more opportunities for bolt-on acquisitions.
As I already mentioned Sunoco is selling off and shutting down their refining business as this represents one of the last steps in their multi-year repositioning of their portfolio. When I look at the assets across Energy Transfer and Sunoco Logistics, the nearly 5,000 retail assets just seem out of place to me, especially in the MLP structure of Energy Transfer. I really cannot see these assets remaining too long post-merger. I do think there is value in the brand and in the historical production of around $260 million in annual EBITDA that either another R&M company like Valero (NYSE: VLO) or a private equity firm would pay a fair price to acquire. They would need to find someone that wouldn't convert the brand but leverage it for future growth. I think getting out of the refining business was a good idea and exiting the retail business would make sense as well.
While I might not like anything related to the retail business they are acquiring, I really do like the strategic significance of the Sunoco Logistics assets, especially their proximity to the Marcellus and Utica Shale areas. For the most part oil and gas are commodities driven by current market prices, which are in turn driven by market sentiment. The pipelines, related storage and logistics businesses, however, can leverage a competitive advantage with both asset location and scale. Energy Transfer gains both in this deal and if nothing else warrants adding Energy Transfer to my watch list.
latimerburned owns shares of Enterprise Products Partners L.P. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Enterprise Products Partners L.P.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.