Decisive Moves And Acquisitions Set To Fuel Revenue And Net Margin Growth

Key Takeaways

• Sunoco's strategic moves, including joint ventures and acquisitions, aim to enhance operational efficiencies, market reach, and cost savings, indicating potential revenue growth.
  
• The company focuses on streamlining operations and optimizing assets for sustainable growth and improved net margins through divestitures and profit-oriented strategies.
  
• Sunoco faces financial and operational risks from high capital spending, integration with NuStar Energy, reliance on specific contracts, JV partnership challenges, and volatile commodity markets.

Catalysts

Distributes and retails motor fuels in the United States.

• The formation of a joint venture with Energy Transfer, combining crude oil and water gathering assets in the Permian Basin, is expected to be immediately accretive to unitholders, signaling potential upside in revenue and net margins due to operational efficiencies and increased market reach.
  
• The acquisition of a refined product terminal in Portland, Maine, is set to enhance Sunoco's Field Distribution business across the East Coast, which could lead to higher revenue through strategic market expansion and utilization of existing infrastructure.
  
• Sunoco's increase in synergy expectations from the NuStar acquisition, aiming to achieve $200 million in commercial and expense synergies annually, indicates potential for significant cost savings and operational efficiencies, positively impacting net margins and earnings.
  
• The divestiture of 204 convenience stores to 7-Eleven for approximately $1 billion streamlines Sunoco's operations, potentially reallocating resources to higher margin operations, which may impact revenue growth positively.
  
• Sunoco's strategy to focus on profit optimization and growth in the Fuel Distribution business, alongside maintaining a strong balance sheet and leveraging strategic acquisitions for asset optimization, sets a solid foundation for sustainable revenue growth and improvement in net margins.

Assumptions

• Analysts are assuming Sunoco's revenue will grow by 3.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.3% today to 3.6% in 3 years time.
• Analysts expect earnings to reach $962.0 million (and earnings per share of $6.89) by about October 2027, up from $773.0 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $842 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.8x on those 2027 earnings, up from 9.2x today. This future PE is greater than the current PE for the US Oil and Gas industry at 10.5x.
• Analysts expect the number of shares outstanding to grow by 0.9% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 9.44%, as per the Simply Wall St company report.

Risks

• The significant amount of capital spending anticipated for growth and maintenance ($300 million for growth and approximately $120 million for maintenance in 2024) could strain cash reserves or lead to increased indebtedness, impacting Sunoco's financial health and net margins.
  
• The integration of NuStar Energy into Sunoco's operations introduces execution risk. Failure to achieve the expected $200 million in commercial and expense synergies annually by 2026 could negatively affect earnings and operational efficiency.
  
• Heavy reliance on take-or-pay contracts and structurally exclusive assets for revenue generation in the Pipeline Systems and Terminals segments may limit flexibility in responding to market changes, posing a risk to revenue stability if counterparties seek renegotiation or if contract renewals are unfavorable.
  
• The formation of a joint venture with Energy Transfer in the Permian Basin, while strategically beneficial, introduces partnership risks. Disagreements or inefficiencies in the JV operation could impede expected accretive financial results to unitholders and impact earnings.
  
• Exposure to volatile commodity markets, especially given the operational focus on fuel distribution and the possibility of recession or demand destruction, could lead to variable margins. While Sunoco's strategy aims to optimize fuel profit, significant swings in commodity prices may challenge revenue and net margins.

Valuation

• The analysts have a consensus price target of $62.5 for Sunoco based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $26.5 billion, earnings will come to $962.0 million, and it would be trading on a PE ratio of 11.8x, assuming you use a discount rate of 9.4%.
• Given the current share price of $52.45, the analyst's price target of $62.5 is 16.1% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.