Jefferies Downgrades Sunoco LP To Underperform

Jefferies has downgraded Sunoco LP SUN to Underperform from Hold, citing further deterioration in fundamentals, and sees escalating leverage may prompt a cut in distribution rates.

"To remain in compliance with credit covenants & restore its financial health, we project a distribution cut to the MQD (43.75¢/qrt) by YE," analyst Christopher Sighinolfi wrote in a note.

Justification For The Downgrade

The analyst noted that leverage would rapidly approach its credit covenant of 6.25x (debt/EBITDA), which tightens to 5.5 times in '17. The first quarter compliant adjusted net debt-to-EBITDA was 5.4 times, and Sighinolfi estimates it to touch about 6.0 times by the end of the year.

"With compliance covenants set to tighten to 5.5x in '17 & ~$2 billion of term loan & revolver maturities looming in '19, we believe leverage, not coverage, will shape its distribution debate. While IDR waivers from ETE would help, we believe they're insufficient to address SUN's needs," Sighinolfi highlighted.

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The analyst believes a distribution cut to the MQD (43.75¢) will enable Sunoco to cut leverage to ~4.0x by 2020. This assumes about $250 million per year of growth capex deployed at about 7.5 times EBITDA, normal gross margins and ATM usage.

Energy Transfer Partners' Influence

Meanwhile, Energy Transfer Partners LP ETP has reduced '16 capex another $1.1 billion and filed a $1.5 billion equity ATM shelf registration despite having about $3.75 billion of available revolver capacity.

"As ETP derives CFs via its ~40 percent SUN interest, it may be preparing for a SUN distribution cut," Sighinolfi noted.

The analyst slashed his 2016 EPS estimate to $1.11 from $1.47 and 2017 EPS forecast to $1.19 from $1.32.

Sighinolfi also cut the price target to $23 from $35, while Sunoco shares closed Tuesday's regular trading at $33.72.