Baird Stops Defending Sunoco, Downgrades To Neutral

The brokerage now model leverage of 6.3x to 6.4x in the second half of 2017, above the post-M&A covenant of 6.0x and said much tighter leverage threatens meaningful distribution growth.

"This implies equity issuance or another solution – distribution cuts have been the weapon of choice for overlevered MLPs. In our view, copious leverage that dangles its toes over the covenant edge adds distribution risk and warrants a cautious approach," analyst Ethan Bellamy wrote in a note.

Bellamy cut 2016 EBITDA and DCF/unit by 12 percent and 22 percent, respectively, on a 10 percent volume reduction somewhat offset by a 1 percent margin increase.

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"We had previously defended SUN on the premise that margins would improve, which they did (+8 percent vs. estimates). But a 13 percent disconnect from our volume forecast ultimately drove a 23 percent miss vs. our DCF/unit, netting to uninspiring 0.95x coverage," Bellamy highlighted.

The analyst also slashed the price target by $13 to $30, while units closed Thursday's regular trading at $29.01. At time of writing, Sunoco was trading up 1.28 percent on Friday at $29.38.

Full ratings data available on Benzinga Pro.