Sunoco (SUN) Closes Strategic Divestiture For $3.2 Billion

Sunoco LP (NYSE:SUN) announced the divestment of its convenience stores to 7-Eleven, Inc. The transaction, valued at $3.2 billion, includes a 15-year take-or-pay fuel supply agreement under which the partnership has agreed to supply 2.0 billion gallons of fuel annually and 0.5 billion gallons in future as well. Notably, the partnership had made an announcement regarding the divestiture in April 2017.

The gains from the transaction are anticipated to be used toward achieving the partnership’s targeted leverage and coverage goals.

Why is Sunoco Divesting?

Currently, the partnership is trying to make a progress by transforming itself. This, it intends to fulfill by divesting its operated stores. The transformation process is being supported by its efforts to exit from retail company operations.

The proceeds from these transactions along with long-term supply agreements will allow the partnership to meet coverage and leverage ratio goals of 1.1 times and 4.5-4.75 times, respectively. Notably, the company decreased leverage ratio to 5.59 times at the end of the third quarter from previous levels.

This strategic divestiture is a major step in transforming Sunoco LP into a more stable income master limited partnership. The divestiture transaction is a testament of the partnership’s focus on strengthening and expanding its fuel distribution and logistics segments.

Further, the partnership’s performance was impaired due to the occurrence of two major hurricanes that hampered its operations during the third quarter. Alike, Sunoco some other major energy players like Exxon Mobil Corporation (NYSE:XOM) Anadarko Petroleum Corporation (NYSE:APC) and Royal Dutch Shell (LON:RDSa) plc RDS.A, had to shut their production operations due to the storms and other natural calamities in Texas.

Going Ahead

The Texas-based partnership expects the financial impact of the hurricanes of the third quarter, to reflect largely in the fourth quarter of 2017 as well. Notably, it anticipates the 7-Eleven transaction to eliminate a majority of field level employee support, insurance costs, and store operations. Further, management expects to reduce operating expenses by approximately 70% from previous levels.

The partnership is currently looking to conclude its strategic conversion of 207 West Texas retail sites to a commission agent model that remains on schedule and is expected to take place late in the first quarter of 2018.

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