Sunoco's NuStar Buy Augurs Expansion in Rack Marketing and Trading -- OPIS Analysis

Sunoco's $7.3 billion acquisition of terminal and pipeline operator NuStar is likely to help the company expand its rack offerings to new markets and allow Sunoco to extend its footprint as the largest fuel distributor in the U.S.

The deal also will give the company more strategic assets in major global trading arenas.

An earlier deal in which Sunoco sold retail sites to 7-Eleven suggests Sunoco likely won't deploy much capital in the retail sector. Most of the branded Sunoco stations in the company's network are owned by other distributors or dealers.

There's an element of déjà vu to the NuStar transaction. Three years ago, Sunoco bought eight storage terminals from NuStar for $250 million and the deal included six sites in the Northeast including a Linden, N.J., facility where gasoline is blended for the New York Harbor market.

Sources believe the NuStar acquisition, which was announced on Monday, will allow Sunoco to expand its presence in profitable gasoline blending and trading. When the 7-Eleven deal was announced, Sunoco also reached an agreement with Zenith Energy that gave it a terminal in Amsterdam and bulk storage in Bantry Bay, Ireland.

Together with company assets along the U.S. Gulf Coast and near New York Harbor, Sunoco will be able to trade around critical assets in some of the world's strongest markets for crude, products and petrochemicals.

Monday's deal, however, likely disappointed some investors who had argued the company should focus on reducing debt, something company leaders had said was a focus.

But Sunoco Chief Executive Joseph Kim told analysts the NuStar deal would eventually enhance cash flow and create about $150 million of synergies. Sunoco is still targeting an investment-grade credit rating and noted that some ratings' agencies put the company's debt on watch for a possible upgrade.

Once the deal closes, Sunoco will step up efforts to market more refined products at NuStar terminals. Kim said the company will likely expand into "western midwestern" markets where the company doesn't have a huge fuel distribution business. Many of the markets served by those terminals have relatively few rack competitors.

A look at NuStar's facilities suggests rack expansions to Council Bluffs, LeMars, Milford, and Rock Rapids in Iowa, Concordia, Hutchinson and Salina in Kansas, Alexandria and Roseville in Minnesota, Fargo and Jamestown North Dakota, Columbus, Geneva, Norfolk, North Platte and Osceola, in Nebraska and Aberdeen, Mitchell, Sioux Falls and Yankton in South Dakota.

The purchase also will give Sunoco a greater presence in Texas thanks to NuStar storage in Amarillo, El Paso, Harlingen, Laredo, Lubbock and San Antonio.

Further, the company will gain access to Vancouver and Tacoma, Wash., markets.

And some NuStar assets in California should enable Sunoco to become more involved with renewable fuels.

Sunoco executives were asked about potential competition concerns by the Federal Trade Commission, but there are few areas where it and NuStar have overlapping terminals.

Both companies own storage facilities in Dallas, but there are no apparent issues in any other part of the U.S.

Despite the positive projections from company officials, the deal was not warmly welcomed by Wall Street. Shares of Sunoco dropped by about 10% after the deal was announced.

Mizuho Financial Group analysts called the transaction "less than stellar" and cast some doubt on Sunoco's promise to benefit from the increased midstream exposure. Raymond James analysts, however, suggested the $150 million figure for operational and commercial synergies might be conservative and highlighted the potential upside in terminals and renewables.

This content was created by Oil Price Information Service, which is operated by Dow Jones & Co. OPIS is run independently from Dow Jones Newswires and The Wall Street Journal.

Reporting by Tom Kloza, [e-mail]; Editing by Jeff Barber, [e-mail]

(END) Dow Jones Newswires

January 23, 2024 13:07 ET (18:07 GMT)

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