Many people view 13 as unlucky. I’m not one of them. To the contrary, 13 can be quite lucky, particularly if it refers to 13-consecutive distribution increases.
Such is the case with Sunoco LP (NYSE: SUN): 13-consecutive quarters, 13-consecutive distribution increases. The latest increase which occurred just last month lifted Sunoco’s distribution yield to 11%.
Sunoco isn’t your typical energy MLP. Unlike most energy MLPs, which focus on oil and gas production, pipelines, or storage, Sunoco focuses on its convenience stores and retail fuel sites. (Many of you are likely familiar with the iconic Sunoco logo.) Distributing motor fuel is another focus. Sunoco distributes fuel to convenience stores, independent dealers, commercial customers, and distributors located in 30 states at approximately 6,800 location.
Sunoco is unlike most MLPs in other ways. Its business of retailing and distributing is stable throughout the commodity cycle. Whether the price of oil is $150/barrel or $30/barrel, Sunoco’s earnings vary less than most MLP earnings.
In 2008, a barrel of West Texas Intermediate crude soared to $150. In late 2015, it sank to $30. In its wholesale business, Sunoco earned $0.10 for every gallon sold in 2008. In 2015, it earned $0.07.
On the retail side, earnings were even more stable:
Sunoco earned $0.25 a gallon in 2008; it earned roughly that amount last year. Unlike many MLPs – production MLPs, in particular – Sunoco doesn’t live and die with oil and gasoline prices.
If you like a good growth story, you’ll like Sunoco’s story. Sunoco has been on a tear since 2009. Revenue was $2.1 billion in 2009; last year it was $16.9 billion. Revenue has grown at a 41.5% average annual clip over the past six years.
Over the same time, operating cash flow has grown at an even more impressive clip. Operating cash flow of $9.8 million in 2009 swelled to $385.8 million last year. That’s an 84% average annual growth rate.
Sunoco has rapidly expanded its convenience-store footprint over the past two years. Indeed, that footprint expanded by over 40%. Sunoco is now one of the top-five convenience-store operators in the country, with over 1.340 outlets.
Food offers an avenue to generate even more cash flow. In the Southwest, Sunoco has incorporated the Laredo Taco restaurant chain into its convenience stores. Sunoco now operates 450 Laredo Taco restaurants at its outlets in Texas, New Mexico, and Oklahoma. Sunoco is rapidly expanding the Laredo Taco offerings into its Southeast and Mid-Atlantic markets, and for a good reason: Management has found that convenience stores with the Laredo Taco offerings have a 40%-plus history of repeat customers compared to stores that lack the offerings. Management has also found that Laredo Taco drives sales of other items, such as beverages, other high-margin food, and merchandise.
This is all good news for future cash flow. Sunoco posted 31.7% margins on merchandise sold in its stores in the first quarter of 2016. It earned $0.23 per gallon for fuel it sold out of the pump and $0.11 per gallon for gasoline it sold wholesale to other companies. The real money is made selling merchandise and food, not gasoline.
Of course, the distribution is the end-all, be-all when valuing an MLP. Therefore, cash flow is king. You want the cash that flows in to cover the distributions that flow out. Distributable cash flow (DCF) supports the distribution. As long as DCF per unit exceeds the distribution, the MLP is in good shape.
Sunoco is in good shape. The distribution rises each quarter, but the distribution remains well- covered by DCF. Over the trailing 12-months DCF posted at $4.49 per unit, which was more than enough to support the $3.06 distribution paid per unit.
A growing cash flow, in turn, should support a growing distribution.
For an idea just how much the distribution has grown, two years ago Sunoco paid $2.17 in annual distributions per unit. Back then, the units traded above $50. Sunoco should pay a minimum of $3.32 in distributions per unit at the new quarterly rate (which I expect to be raised again next quarter). Today, its units trade around $30. Two years ago, the units traded at 23 times the annual distribution. Today, they trade at just over nine times.
In short, Sunoco is cheap, so evinced by a double-digit distribution yield and the low multiple the units trade at in relation to the distribution.