Fitch Ratings has withdrawn Sunoco LP's (SUN) 'BBB-'/'RR1' rating on its senior secured revolving credit facility because the facility has been amended to be an unsecured revolving credit facility.
SUN no longer has any outstanding debt rated by Fitch at the senior secured level.
Fitch believes the acquisition of NuStar will improve SUN's business risk profile through an increase in geographic and business line diversity. Fitch considers the announced financing plan balanced and expects leverage to return to the low 4x range within two years of transaction close.
Key Rating Drivers
Improved Business Mix and Geographic Diversity: NuStar will contribute crude terminals and pipelines, refined products terminals and pipelines, a large ammonia pipeline, and exposure to renewable fuels on West Coast. Of the pro-forma EBITDA, approximately 45% will come from fuel distribution, 25% from crude oil, and 25% from refined products, with the balance from other services. The ammonia pipeline and renewables presence on the West Coast provides for near-to-medium-term growth opportunities in the energy evolution. Prior to the acquisition, a large majority of EBITDA came from fuel distribution.
NuStar has a substantial asset footprint in the Midwest, where it has refined products terminals and pipelines and its ammonia pipeline. The company also has some refined products terminals and storage on the West Coast. This increased geographic diversity is credit positive, as it decreases exposure to region specific events that could negatively impact operations.
Stable Cash Flows: SUN currently has a contract with 7-Eleven, Inc. with nine years remaining that provides a fixed price for a fixed number of gallons per annum. The specified base gallonage accounts for a little over 25% of the partnership's run rate total and is expected to increase as part of a recently announced sale of SUN's West Texas assets to 7-Eleven. In addition, the entire value chain stretching from retail stores (where the partnership is a lessor, and, in small numbers, a retailer) to wholesaling (the partnership core) features elements that make for resilient margins. The product is a necessity of many U.S. citizens' everyday lives, and the value chain in aggregate generally adjusts its selling price when volumes fall, like at the onset of the pandemic, to preserve a gross margin dollar value.
Fitch believes the combined entity will have improved cash flow stability. NuStar's EBITDA is made up of roughly one-third of each of the following: take-or-pay contracts with largely high creditworthy or large private/international counterparties, fixed-fee contracts for the only pipelines into and out of location advantaged and highly utilized Valero Energy Corporation (BBB/Stable) refineries, and fixed-fee volume exposed contracts that are almost entirely exposed to Permian Basin crude oil dynamics. In volume exposed contracts, exposure to the Permian is somewhat mitigated because it is in the basin with the lowest breakevens in the U.S.
Leverage Target Unchanged: Within about two years of acquisition close, Fitch expects SUN to be back around its 4.0x leverage target, a target that remains unchanged with the acquisition. SUN's acquisition of NuStar is being financed in a balanced manner and will include the assumption of NuStar debt. Expensive pieces of subordinated debt and preferred units at NuStar are expected to be replaced with senior unsecured notes. SUN calculates its leverage using a net leverage, which generally leads to a lower leverage number than Fitch's figure.
Fragmented Motor Fuels Distribution Sector: Sunoco is the largest independent distributor of motor fuels in the U.S. The overall sector, including both independents and non-independents, is highly fragmented. Sunoco's current business has a wide range of activities, from being the bridge between credit card banks and Sunoco credit card customers, to wholesaling to other wholesalers at its terminals. Terminal ownership continues to grow as the company makes acquisitions, and over the years, the company has demonstrated its ability to smoothly integrate new acquisitions.
Fitch believes the sector is likely to present attractive acquisition opportunities. In the event a series of new deals are struck, Fitch will monitor acquisition multiples and financing plans. Fitch believes Sunoco's 4.0x long term-leverage target policy is important to its rating.
Parent-Subsidiary Linkage: Sunoco's ratings reflect its Standalone Credit Profile with no express linkage to its parent company. Fitch believes Energy Transfer LP (ET; BBB/Stable), the general partner and owner of a minority but meaningful stake in the limited partnership units, has the stronger credit profile of the two entities, given ET's size; scale; and geographic, operational and cash flow diversity relative to Sunoco. No uplift is provided to Sunoco's ratings, as Fitch considers strategic, operational and legal (e.g., cross-defaults) incentives weak. Certain Sunoco board members are designated as independent board members and serve on a conflicts committee.
Issuer Profile
SUN is a wholesale motor fuels distributor that distributes diesel and gasoline to retail service stations throughout the U.S., with a focus on the Northeast. Pro-forma for the NuStar acquisition, SUN will have an increased presence in the Midwest, crude terminals and pipelines, refined products terminals and pipelines, a large ammonia pipeline, and exposure to renewable fuels on West Coast.
SUNOCO LP 
