Sunoco Rises Out Of The Ashes: Buy This MLP?

• Sunoco LP SUN shares have declined 23.87 percent year-to-date, hitting a low of $32.48 on October 28.
• John Edwards of Credit Suisse has upgraded the rating on the company from Neutral to Outperform, while raising the price target from $49 to $57.
• Sunoco and Energy Transfer Partners LP ETP have announced a final dropdown, which Edwards mentioned has come in larger and earlier than anticipated.

Analyst John Edwards elaborated that the two companies announced a final dropdown worth $2.27 billion, on November 16, of Energy Transfer Partners’ combined 68 percent ownership of Sunoco’s wholesale motor fuel business, along with 100 percent of the retail motor fuels and convenience stores business.

Expected to close in 1Q16, the final dropdown has come in “much ahead of mgmt.'s end-2016 timeframe expectations and larger than earlier expectations of dropping down in tranches,” Edwards said.

The transaction would take Sunoco’s pro-forma recurring EBITDA from $500 million to $750 million, while management expects EBITDA growth of 6-7 percent going forward.

According to the Credit Suisse report, “The deal structure removes the equity overhang which was plaguing the SUN units as its current yield made public equity issuance unattractive to fund drops. Further, SUN anticipates no further equity need in 2016.”

Sunoco intends to spend $400-500 million on growing its retail business and $90 million on maintenance, annually.