Sunoco Stock: Distributions Stalled Despite Pump Pain (NYSE: SUN)
After Sunoco (NYSE: SUN) impressively maintained their distributions through the turmoil of 2020 and the bumpy start to 2021, their high yield of 8.09% seemed safe but stuck looking ahead, like my previous post discussed. Subsequently, the prices of oil and therefore of fuel have reached heights not seen for almost a decade, but despite the pain at the pump, their distributions are still blocked.
Executive summary and ratings
Since many readers are likely short on time, the table below provides a very brief summary and scores for the main criteria assessed. This Google document provides a list of all my equivalent ratings as well as more information about my rating system. The following section provides a detailed analysis for readers wishing to delve deeper into their situation.
*Instead of simply assessing distribution coverage through distributable cash flow, I prefer to use free cash flow as it provides the strictest criteria and also best captures the true impact on their financial position.
When they first open their cash flow statement for 2021, their full-year operating cash flow of $543 million initially looks disappointing after the $512 million they had generated over the past nine first months. Fortunately, this is simply a result of the temporary $122 million working capital drawdown that they saw in the first nine months of 2021 reverse in the fourth quarter, leaving no significant movement in working capital. for the year. Regardless of these temporary influences, their operating cash flow for 2021 still saw a decent 8.17% year-over-year improvement from their previous result of $502 million in 2020, offsetting their higher capital expenditures and thus keeping their free cash flow broadly stable. year-over-year at $378 million, which provided adequate coverage for their distribution payouts of $357 million.
With oil prices soaring to their highest level in nearly a decade, the pain consumers go through each week to fill up their vehicles has become one of the most important topics. Naturally, investors might wonder if this fuel-related partnership is beneficial and thus helps to relieve the pressure on their portfolios, but unfortunately this is not the case as their margins and volumes are normally inversely correlated, according to the commentary. of direction included below. .
“Again, I remind everyone that if volume weakness were to continue for a period of time, we would expect it to be offset to some extent by higher breakeven margins, as we have known him for the past two years.”
– Sunoco Q4 2021 conference call.
When it comes to business, finance, and economics, there are rarely free lunches and so if you benefit one way, you tend to lose the other way too. This dynamic within their margins and volumes has been evident over the past few years, with 2019 seeing record volumes of 8.2 billion gallons, but with a margin of only 10.1 cents per gallon, which was lower than their 11.9 and 11.2 cents per gallon margins seen in 2020 and 2021 respectively which saw lower volumes of 7.1 and 7.5 billion gallons respectively, according to their quarterly reports. While making their financial performance more stable, it also means that the higher prices at the pump don’t necessarily help that investment and therefore there are no free lunches because their stability comes at the expense of less upside potential.
When looking at their guidance for 2022, it further confirms this momentum with their mid-term adjusted EBITDA of $790 million, which is only a modest 4.77% year-on-year increase. other compared to their result of $754 million in 2021, according to their fourth quarter. of the 2021 earnings announcement. Given that their operating cash flow is expected to see a positive correlation, it is expected to increase by around 5% to around $570 million in 2022. Alongside this, their forecast also indicates spending in growth and maintenance capital of $150 million and $50 million respectively for 2022, which at a total of $200 million represents a modest year-over-year increase from their $174 million dollars in 2021. That leaves their estimated free cash flow for 2022 at around $370 million, which would once again provide adequate coverage for their $357 million per year in distribution payments. While this remains safe and sustainable, it again leaves virtually no room to fund material growth and so despite soaring fuel prices, their distributions remain locked in unless they reduce future capital spending, although that of course remains unknown.
After the fourth quarter of 2021, their net debt ended the year at $3.23 billion compared to its level of $2.84 billion during the previous analysis after the third quarter. Although representing a significant increase for only one quarter, this was already anticipated in my previous analysis and resulted from the acquisition of their $255.5 million terminal as well as the reversal of their working capital. Looking to 2022, unless they make further acquisitions, their net debt should remain broadly unchanged given the small gap between their distributions and their estimated free cash flow.
Since their cash balance has also only seen immaterial changes, this means that not only has their leverage remained broadly unchanged, but also their liquidity, making both rather redundant to reassess in detail, although if new readers are interested in more details, please refer to my previously linked article. The two relevant charts have always been included below for reference, showing that their leverage remains stretched between the high and very high territories with their net debt to EBITDA of 3.53 slightly above the threshold of 3, 51 for the former, while their operating debt/cash ratio of 5.95 is above the threshold of 5.01 for the latter. Meanwhile, their respective current and cash ratios of 1.34 and 0.03 both indicate that their liquidity remains adequate, mitigating the risks associated with their otherwise concerning leverage.
While their high dispensing efficiency certainly looks appealing on the surface it shouldn’t benefit from this fuel price spike and therefore similar to 2021 it once again remains safe but stuck in place as it consumes most of their free cash flow. Since it looks like 2022 represents another year of status quo for their financial performance, I think maintaining my hold rating is appropriate, with their unit price still trading around its five-year highs and close to intrinsic value. estimated in my previous article. .
Notes: Unless otherwise stated, all figures in this article are taken from Sunoco’s SEC Filingsall calculated figures were performed by the author.