Sunoco LP's $3.3 billion deal to shed the majority of its convenience stores to pay down debt and focus its fuels business strategy was quickly rewarded in the equity and debt markets.
Sunoco stock rose 20% on April 6, the day the sale to 7-Eleven Inc. was announced, landing at $28.69. The units were still climbing April 7, up an additional 3.9% just before noon ET, at $29.82.
On the credit side, Fitch Ratings put Sunoco and Sunoco Finance Corp. on rating watch positive. "Fitch believes that the wholesale fuel business, supported in part by a long-term (15 year) fixed rate contract with 7-Eleven, should generate fairly consistent earnings and cash flows for [Sunoco]," the rating agency said in an April 7 note.
"Total earnings and cash flow ... will be at lower levels than previously expected but increased cash flow consistency coupled with management's stated objective to run the business with a lower leverage (debt/adjusted EBITDA) target of 4.5x to 4.75x and distribution coverage of 1.1x or higher should result in a better capitalized and lower business risk," Fitch said.
Fitch did, however, express some hesitation about Sunoco's financial future as the finished-petroleum-products specialist in the Energy Transfer Equity LP/Energy Transfer Partners LP complex. "There remains a fair amount of uncertainty surrounding [Sunoco]'s new strategic direction. ... The ultimate amount of debt reduction, earnings and cash flow generation, and other credit considerations of the pro forma [Sunoco] are not yet known."
S&P Global Ratings analyst Michael Grande noted that while the the transaction is a net positive, creditors will "probably feel a little bit better" about the partnership's position than equity investors.
"Even with paying down debt and their goal to get to a 4.5x to 4.75x EBITDA, which is much better than the 7x they are now, they have no plans to reduce their distribution, and their distribution coverage is still, I sense, somewhat of a concern with the equity side … and quite frankly with us," he said in an interview April 6. "The only way they're going to make sure they have enough money to pay their distribution is either through … a share buyback or increasing EBITDA from acquisitions."
S&P Global Ratings and S&P Global Market Intelligence are owned by S&P Global Inc.