Significant Distribution Upside through Organic Growth, Acquisitions and Dropdowns from Susser Holdings and Sunoco
Susser Petroleum Partners LP (NYSE: SUSP) is a leading independent (non-refiner) regional wholesale distributor of motor fuels. The company is an outright market leader in Texas and has small but growing distribution operations in the neighboring states of Oklahoma, New Mexico, and Louisiana, and over 70 years of operating experience. SUSP is also the largest distributor of Chevron and Valero branded motor fuels in Texas. The company’s convenience store clients represent an attractive customer segment which has given SUSP eleven consecutive years of merchandise sales growth.
Susser is a key player in the motor fuels wholesale distribution segment in the southwest.
Through its trucking distribution network, SUSP supplies branded and non-branded petroleum products to retail locations, commercial fleets and other end users. The company has relatively stable cash flows from long-term fee-based contracts and real estate rental income, and has grown organically and through acquisitions while giving investors capital appreciation and stable income through quarterly distributions.
Over the past 12 months, SUSP supplied over 1.6 billion gallons of motor fuel to 630 affiliated Stripes stores that are owned by SUSP sponsor Susser Holdings Corporation (NYSE: SUSS), over 80 independent convenience stores, approximately 500 branded dealer locations that are independently operated and over 1,300 third party customers with no brand affiliation. Its bulk scale dominance gives it a pricing advantage which it drops down to its retail customers, locking them into favorable long-term supply agreements.
In addition, SUSP leverages its experience to offer value-added services – such as real estate and site selection, construction and maintenance, compliance, inside sales, marketing and business planning – to help clients build their retail businesses. For example, directly or through partners, SUSP offers services such as retail-location power washing and lighting maintenance to keep parking and pump areas clean, bulk CO2 handling for soda fountains, ATM infrastructure for convenience stores (in partnership with Royal Bank of Scotland) and retail electricity supply in partnership with MP2 energy – tools that help its retail customers grow their business beyond just fuel.
Units Up 120% since September 2012 IPO amid Near-Term Valuation Concerns
SUSP went public in September 2012 as the wholesale motor fuel operations spin-off from Susser Holdings Corp. Since then, units are up almost 120% and have delivered triple the performance of the S&P 500 index gain of about 40%. Shares are up almost 40% since the announcement of Energy Transfer Partners’ acquisition of SUSP parent, Susser Holdings Corp. SUSP’s market capitalization of $1.1 billion is well above book value of about 80 million.
With shares up sharply in recent months and significant upside from the ETP acquisition, investors may want to consider buying shares while also buying at-the-money puts (Married Put strategy) to receive distributions, retain upside potential but protect against near-term downside.
Quarterly Distribution Up 15% with 4.4% Yield
SUSP offers quarterly distributions that have grown 14.8% from $0.4375 for Q1 2013 to $0.5021 per unit for Q1 2014, with an annualized distribution of $2.0084 per unit. With units at $51.49 (as of July 17, 2014), SUSP offers a distribution yield of 4.40%. In parallel, distributable cash flow (DCF) per unit has continued to increase relative to payouts and distribution coverage has grown from 1.03x in Q4 2012 to 1.27x in Q1 2014 suggesting that there is ample opportunity for distribution growth in the coming quarters based on fundamental cash flow alone without resorting to risky financing alternatives.
Moreover, with planned dropdowns of ETP and Susser Holdings retail assets to Susser Petroleum Partners, DCF should grow significantly over the coming year with stable long-term supply contracts and excellent revenue visibility.
Diverse and Stable Sources of Cash Flow
SUSP distributes about 1.6 billion gallons of motor fuel annually to over 630 Stripes and Sac-N-Pac convenience stores (as exclusive supplier), 100 third-party consignment locations, 520 third-party dealer locations and about 1,900 active commercial customers such as major trucking companies. About 90% of its volumes are sold under long-term fee-based contracts. SUSP also derives a modest amount of stable rental income from owned real estate that it leases.
Strong Long-Term Supplier Relationships with Top Refiners
SUSP has valuable supply contracts with major oil companies and refiners – 20 suppliers in all including key brands (Chevron, Citgo, Conoco, Exxon, Mobil, Shell, Texaco and Valero). SUSP is among the largest U.S. branded motor fuel distributors of Valero (which accounts for 35% of SUSP’s supplied volume) and Chevron/Texaco (20% of SUSP volume). SUSP has long-term relationships with these suppliers that provide attractive terms and scope for steady growth.
Proven Sales and Earnings Growth
SUSP has steadily increased motor fuel sales (at a 9% CAGR from 2010 – 2014) and fuel gross profit (at a 15.2% CAGR from 2010 – 2014). Growth to third-parties has outstripped growth to Susser Holdings’ Stripes’ stores and suggests that the company isn’t coasting along on its sponsor’s back but is independently proving its value-proposition to outside clients. This proven history bodes well for unit holders looking for unit price and distribution growth down the road.
SUSP has grown gross profits by steadily expanding its motor fuel margin from 3.2 cents per gallon in 2010 to 3.8 cents per gallon in Q1 2014. More tellingly, while margins have stayed flat with Stripes and consignment customers, they have risen impressively with third-party clients from 3.5 cents per gallon to 5.3 cents per gallon proving out the company’s competitive value proposition.
Organic Growth Complemented by Acquisitions
Wholesale growth was organically driven by steady new customer additions, with an estimated 28-45 new customers slated for 2014.
Sales growth was also aided by acquisitions. Since August 2009, SUSP has made five wholesale acquisitions and added over 190 new long-term distribution contracts and other commercial customers.
In September 2013, SUSP acquired Gainseville Fuel, Inc., and gained annual volume of 60 million diesel gallons supplied to oil and gas producers in North Texas and Oklahoma. The acquisition is expected to add $0.05 to $0.10 per SUSP unit in distributable cash flow in 2014 and $0.03 to $0.07 in earnings per SUSS share.
In January 2014, SUSP acquired certain retail store assets, including fuel distribution contracts, from Sac-N-Pac Stores and 3W Warren Fuels. The acquisition brought in 47 convenience stores in south-central Texas, fuel supply to 19 independent dealer locations, 7 tracts of land and 65 million gallons in combined annual fuel volume.
Moreover, SUSP operates in a highly-fragmented industry that is dominated by single-store operators and this offers significant opportunity to pursue acquisitions through the consolidation of smaller, less efficient players. For example, SUSP supplies only 5% of all convenience stores in its existing markets, and Texas has more convenience stores than any other state in the U.S., so growth opportunities are strong with over 20,000 stores in contiguous states.
Financially, SUSP has $159 million of borrowing capacity under its revolving credit facility which can be expanded by $100 million, so cash is not a problem as it pursues acquisitions. The company could also team with SUSS/ETP to pursuer joint acquisitions.
Well Positioned in Highly Attractive Texas Region
SUSP and parent company Susser Holdings are leaders in the state of Texas which was recently ranked #1 in job growth from June 2008 to June 2013. Texas has a relatively strong housing market, low unemployment and is benefiting from increased oil and gas drilling. Texas’ population growth is projected to be among the highest in the nation and is projected to rise from 26 million in 2014 to 45 milling by 2040, with concomitant demand for motor fuel and convenience stores. In May 2014, Texas was named the “Best State for Business” by CEO Magazine for the 10th consecutive year. So the company’s market leadership in Texas will contribute substantially to growth.
Relationship with Susser Holdings Corp. (SUSS) Benefits Company
Susser Petroleum Partners – primarily the wholesale gasoline business with value-added services and a limited number of retail outlets – was spun out of Susser Holdings Corp. (SUSS) as a master limited partnership. Subsequently, Susser Holdings owned 100% of SUSP’s General Partner (GP), all incentive distribution rights (IDRs) and a 50.2% limited partner interest in SUSP common units. With the spinoff, SUSP owned motor fuel distribution wholesale operations, 41 stores and 12 sites that were leased to independent operators (its real estate business).
Post-spinoff, Susser Holdings owned one of the largest combined retail/wholesale footprints in the fast-growing southwest region, with over 630 retail, consignment and contracted branded dealers. With its retail stores and fuel distribution network, Susser Holdings is one of the largest non-refiner retailers of motor fuel in Texas, with 1.6 billion gallons sold in 2013.
April 2014 Acquisition of Susser Holdings by Energy Transfer Partners = Dropdowns and Exponential Growth
On April 28, 2014, Sunoco-sponsored Energy Transfer Partners L.P. (ETP) announced its acquisition of 100% of Susser Holdings Corporation (SUSS) common shares for about $1.8 billion. The transaction is expected to close in Q3 2013 subject to customary shareholder and regulatory approvals and will be immediately accretive to ETP earnings per unit.
Susser Petroleum Partners will continue to be an independent publicly-traded MLP and should benefit from ETP and SUSS retail asset dropdowns in a series of transactions.
ETP funded the acquisition with a 50/50 combination of cash and stock and gave Susser shareholders the option of receiving either 1.4506 ETP common units or $80.50 in cash or a 50/50 combination of $40.125 in cash and 0.7253 ETP common units per Susser share, subject to the available cash limit. This flexibility in opting for cash and/or stock gives Susser Holdings’ shareholders the ability to defer tax on capital gains by opting for ETP units in lieu of cash.
ETP also reached agreement with a group holding 10% of Susser Holdings’ to vote their shares in favor of the merger and receive 100% ETP common units as consideration.
Through the acquisition of Susser Holdings, ETP will gain ownership of Susser Petroleum Partners’ General Partner (GP), all incentive distribution rights (IDRs) in Susser Petroleum Partners LP (SUSP), 11 million SUSP common units (representing a 50.2% stake in outstanding SUSP units) and Susser Holdings’ retail convenience stores that sell branded and “Stripes” brand gasoline in Texas and its neighboring states.
Subsequent to the merger, ETP plans to combine Susser Holdings’ retail stores with its Sunoco retail business (which includes over 5,000 retail stores, primarily on the East Coast) and create a best-in-class retail gasoline sales platform that is well-diversified by geography and product lines.
This acquisition is expected to generate synergy cost savings of $70 million annually from economies of scale and the integration of operations within six to twelve months of closing. Susser should also benefit from Sunoco’s large-scale fuel sourcing advantage and brand for expansion, with strong growth opportunities through a best-in-class retail platform.
Growth through ETP and Susser Holdings Dropdowns
Susser Partners will benefit significantly from ETP’s acquisition of Susser Holdings because their integration plan proposes using SUSP as a captive drop down vehicle for existing ETP and SUSS retail businesses in a series of synchronized transactions in exchange for new SUSP units and cash which will be used to pay down ETP debt.
Dropdown transactions are an affirmation of the strength of Susser’s management team including Board Chairman Sam L. Susser and CEO Rocky Dewbre who have extensive experience with Susser’s wholesale and retail operations.
However, analysts are worried about how SUSP will finance its acquisition of existing ETP and SUSS retail businesses and fear the possibility of significant unit holder dilution and debt burden if transfer assets are priced above market value.
Q1 2014 Results Reflect 40% Adjusted EBITDA Growth
For the first quarter ended March 31, 2014, SUSP increased gallon volume by 18%, gross profit by 42% and gross margin by $0.04 per gallon relative to Q1 2013. Q1 revenue totaled $1.2 billion, up 11.6% over Q1 2013.
The company added 27 new contracted dealers with eight organic additions and 19 acquired through its Sac-N-Pac / 3W Warren Fuels acquisitions. Year on year volume sales were primarily attributable to acquisitions and the growth in supplies to affiliated Stripes stores in a strong Texas economy. Adjusted EBITDA increased 40% to $15.7 million and distributable cash flow (DCF) was up 35% to $14 million.
Quarterly net income rose to $10.1 million ($0.46 per unit), up from $8.2 million ($0.38 per unit) in the year-ago quarter. While fuel gallons sold to affiliate customers (277.8 million gallons to Stripes, San-N-Pac) increased 10.7%, fuel sales to third parties (155.6 million gallons) were up 34.3%.
In the quarter, SUSP completed the dropdown of its 45th Stripes store as part of its 75-store dropdown option from Susser Holdings, with 12 dropdowns through the first five months of 2014.
At quarter end, SUSP had $6 million in cash, $158 million in receivables, $206 million in property and equipment and $454 million in total assets. The company had $230 million in borrowings against its revolving line of credit, up from $156 .2 million on partial debt financing of acquisitions. Long-term debt dropped substantially from $29.4 million to $3.5 million. As a result, its debt-to-assets ratio is about 0.52x. At quarter end, unit holders had net equity of $79.9 million.
Susser Petroleum Partners offers revenue stability with long-term fee-based contracts with a 10 year fixed contract with Susser Holdings and a 5-year average remaining term on contracts with diversified third parties. As a wholesaler, the company bears minimal commodity risk, has limited working capital needs and is a leading regional player in a strong and resilient industry.
Susser Petroleum Partners can grow from dropdown and organic growth through its relationship with SUSS/ETP with Stripes motor fuel volume growth and significant sale/leaseback opportunities on 30 Stripes stores; by continuing to successfully expand its third-party wholesale motor fuels distribution business with new third-party dealers, unbranded stores and commercial customers; and through acquisitions. As a result, distributions should continue to grow for the foreseeable future but could be partly diluted by new shares issued to acquire dropdowns.
SUSP has adequate liquidity and excellent distribution coverage so investors can enjoy capital appreciation upside with a growing distribution yield and low risk, with strong overall business growth prospects. Investors should consider establishing positions ahead of the completion of the ETP acquisition but protect near-term downside with