Sunoco LP (NYSE:SUN) This autumn 2021 Earnings Convention Name February 16, 2022 10:00 AM ET
Firm Individuals
Scott Grischow – Treasurer, Vice President-Investor Relations and Mergers & Acquisitions
Joe Kim – President and Chief Government Officer
Karl Fails – Chief Operations Officer
Dylan Bramhall – Chief Monetary Officer
Convention Name Individuals
Theresa Chen – Barclays
Gabe Moreen – Mizuho
John Royall – JPMorgan Chase
Selman Akyol – Stifel
Elvira Scotto – RBC Capital Markets
Ned Baramov – Wells Fargo
Operator
Greetings and welcome to Sunoco LP’s Fourth Quarter 2021 Earnings Convention Name. Presently all members are in a listen-only mode. A matter-and-answer session will observe the formal presentation. [Operator Instructions] Please word this convention is being recorded.
I’ll now flip the convention over to your host, Scott Grischow. You might start.
Scott Grischow
Thanks and good morning everybody. On the decision with me this morning are Joe Kim, Sunoco LP’s President and Chief Government Officer; Karl Fails, Chief Operations Officer; Dylan Bramhall, Chief Monetary Officer; and different members of the administration staff. At present’s name will include forward-looking statements which are topic to varied dangers and uncertainties. These statements embody expectations and assumptions concerning the partnership’s future operations and monetary efficiency, together with expectations and assumptions associated to the impression of the COVID-19 pandemic.
Precise outcomes may differ materially, and the partnership undertakes no obligation to replace these statements based mostly on subsequent occasions. Please seek advice from our earnings launch in addition to our filings with the SEC for an inventory of those components. Throughout at present’s name, we may also focus on sure non-GAAP monetary measures, together with adjusted EBITDA and distributable money move as adjusted. Please seek advice from the Sunoco LP web site for a reconciliation of every monetary measure.
Earlier than I flip the decision over to Dylan, I wish to briefly cowl the outcomes for the fourth quarter of 2021. The partnership recorded internet earnings of $100 million in comparison with $83 million within the fourth quarter of 2020. Adjusted EBITDA was $198 million in comparison with $159 million within the fourth quarter of 2020. The partnership offered 1.9 billion gallons within the fourth quarter, up 3% from the fourth quarter of final 12 months. Gasoline margin for all gallons offered was $0.12 per gallon in comparison with 9.2 cents per gallon a 12 months in the past.
Complete fourth quarter working bills of $123 million had been larger on a year-over-year foundation. Fourth quarter distributable money move as adjusted was $143 million in comparison with $97 million within the fourth quarter of 2020, yielding a protection ratio of 1.7x. The protection ratio for the complete 12 months 2021 was 1.6x. Lastly, on January 26, we declared $0.8255 per unit distribution, according to final quarter. The sturdiness of our enterprise and historical past of delivering outcomes continues to help a steady and safe distribution for our unitholders.
I’ll now flip the decision over to Dylan to debate the complete 12 months outcomes and our outlook for 2022.
Dylan Bramhall
Thanks, Scott. Earlier than I stroll you thru our 2021 full 12 months outcomes and accomplishments, I would prefer to make a number of feedback on our just lately introduced acquisition of the 23,000 barrel a day transmix facility in Huntington, Indiana. This acquisition represents one other actually thrilling alternative to proceed to construct out our midstream asset base with a low-risk strong return deployment of capital. Our robust distribution protection and stability sheet proceed to permit SUN to spend money on a lot of these alternatives, which can contribute further worth to our stakeholders for years to come back.
Now shifting over to our full 12 months 2021 outcomes and accomplishments, we recorded adjusted EBITDA of $754 million, above the midpoint of our 2021 steerage vary and up 2% from 2020. Distributable money move as adjusted was $542 million, up 5% versus the prior 12 months. We improved our already robust distribution protection ratio to 1.6x, up from 1.5x in 2020 and 1.3x in 2019. Our stability sheet and liquidity place stays robust with leverage on the finish of the 12 months of 4.17x and availability on our credit score facility of roughly $930 million. Lastly, our robust monetary place allowed us to reap the benefits of a diversified set of progress alternatives in 2021, together with the acquisition of 9 refined merchandise terminals and the development of a greenfield terminal in Brownsville, Texas.
With all of those accomplishments because the backdrop, we enter 2022, poised to proceed to ship robust outcomes. In December, we offered steerage for 2022 adjusted EBITDA of between $770 million and $810 million. Underpinning this steerage are the next assumptions: gas volumes within the vary of seven.7 billion to eight.1 billion gallons, annual gas margin between $0.105 and $0.115 per gallon, complete working bills of between $490 million and $500 million, upkeep capital of $50 million and progress capital of roughly $150 million.
The free money move producing functionality of our operations permits us to give attention to the pillars of our capital allocation technique: first, to take care of steady and safe distribution for our unitholders; second, to guard our stability sheet by way of debt paydown when prudent; and third, to pursue disciplined funding in our progress alternatives just like the acquisition, which we introduced at present. We can be financially disciplined with a goal protection ratio of a minimum of 1.4x and a goal leverage ratio of 4.0x. Sunoco’s constant monetary outcomes all through commodity cycles have turn into an indicator of our partnership and we count on 2022 will convey extra of the identical.
With that, I am going to now flip the decision over to Karl to stroll by way of some further ideas on volumes, bills and our outlook for 2022. Karl?
Karl Fails
Thanks, Dylan. Good morning everybody. We delivered one other robust quarter, supported by continued energy in margins and expense self-discipline. As well as, the contribution from our just lately accomplished acquisitions have been in step with our expectations. Volumes for the quarter had been up 3% from final 12 months. We did see some weak spot creep into the top of the quarter because of the Omicron variant spreading in the US. This carried over into the start of January, however within the final couple of weeks, we now have seen volumes returning.
Turning to margins. Within the fourth quarter, we delivered robust margins of $0.12 per gallon, our strongest margin quarter in 2021. Elevated volatility contributed. Whereas RBOB costs had been flat from the start to the top of the quarter, there was over a $0.50 per gallon unfold from low to excessive through the quarter. As well as, we proceed to see the good thing about larger breakeven margins, together with when volumes softened close to the top of the quarter. That very same market dynamic has carried into the start of this 12 months.
Turning to 2022. We count on one other 12 months of strong progress and we’re assured in attaining our EBITDA steerage regardless of potential impacts to volumes from the Omicron variant, excessive crude costs, provide chain and labor points and common inflation, all of which we thought-about once we issued steerage. With respect to volumes, first quarter volumes are sometimes the bottom of the 12 months primarily as a result of decrease variety of days within the quarter. I discussed earlier some impression from Omicron. Once more, I’d remind everybody that if quantity weak spot had been to maintain for a time period, that we might count on it to be offset to some extent by larger breakeven margins as we have skilled for the final two years.
As talked about on final quarter’s name, we now have applied methods to cope with longer provide chain. Even with these changes, provide chain challenges did contribute to decrease than guided capital spend in 2021. However the decrease 2021 capital spend doesn’t impression our 2022 steerage. Persevering with with the topic of capital, the $150 million progress CapEx steerage offered in December can be primarily targeted on increasing the gas distribution enterprise with some capital spent on our midstream operations. This consists of the completion of our Brownsville terminal, which stays on observe for commissioning by the top of the primary quarter. We’re excited to convey this organically-developed asset in service with our robust home demand in addition to the export alternatives from this strategic location.
As well as, we’re thrilled to announce one other significant growth to our midstream portfolio with the deal to amass a 23,000-barrel per day transmix processing and terminal facility in Huntington, Indiana for $190 million. The power is the most important transmix plant in North America and has on-site product storage of roughly 750,000 barrels. The transaction is according to our technique to develop and diversify our operations by way of the growth of our midstream enterprise and can be instantly accretive. By the second 12 months of operation, our acquisition a number of, together with synergies, can be under 7x. We count on to shut the acquisition late within the first quarter or early second quarter topic to customary regulatory approvals.
Let me spend a minute and clarify why we’re so excited by this deal. First, lots of you’ll keep in mind that we entered the transmix processing enterprise over 5 years in the past with the acquisition of operations in U.S., Texas and Birmingham, Alabama. These property have been a strong contributor for us during the last 5 years and combine properly with our gas distribution enterprise. Margins are strong and transmix volumes have been much more steady than the associated gasoline and diesel volumes.
The Gladieux plant in Indiana is strategically positioned on the crossroads of a number of Midwest pipelines and trucking routes and can construct on our present transmix operations. While you match up the robust underlying enterprise with our confirmed operations observe file, the synergy with our gas distribution enterprise and the enticing buy worth, this deal is a superb follow-up to our NuStar acquisition we did final 12 months. I’ll wrap up by stating that we had been off to an thrilling begin to 2022, and as anticipated, we’ll proceed to give attention to delivering outcomes for our stakeholders by way of our confirmed recipe of gross revenue optimization, delivering on bills, strong and environment friendly operations and rising our core enterprise. Joe?
Joe Kim
Thanks, Karl. Good morning everybody. We delivered very robust leads to 2021. We got here into the 12 months financially wholesome and we completed the 12 months stronger than the place we began. Just a few monetary highlights from final 12 months. We delivered file EBITDA and DCF. Our enterprise stays extremely resilient and our capital expenditures proceed to supply incremental EBITDA and DCF progress. Our LTM protection ratio is now round 1.6x whereas our leverage ratio continues to lower in the direction of our 4x goal.
Yr after 12 months we proceed to ship on our steerage and display the resilience of our enterprise mannequin. Trying ahead we count on to have one other good 12 months. We’re a few month and a half into the brand new 12 months, Karl offered some insights into quantity and margin atmosphere we’re presently experiencing, factoring within the impression of the Omicron variant. We’re studying to reside with the virus and we count on our quantity to proceed to develop because the 12 months progresses.
As you consider our enterprise for 2022, take into accout the next. The primary quarter is performing within the profitability vary that we anticipated once we offered steerage again in December. Underlying the primary quarter in addition to the remainder of the 12 months, trade breakevens proceed to be excessive. We’re seeing this play out because the market is passing on worth will increase to the Rack and Avenue. There can be instances when short-term margin stress exists. Nonetheless, we imagine the ground on general margin is larger than historic averages. And at last, we now have a confirmed observe file of optimizing gross revenue in each headwind and tailwind atmosphere. We even have a confirmed observe file of managing general bills. Backside line, we count on to have one other good 12 months.
Shifting on to progress. We proceed to strengthen our enterprise by rising our midstream property. With the long run addition of the Gladieux acquisition and the start-up of the Brownsville terminal, we proceed to vertically combine our enterprise. Terminals are a crucial a part of the sphere distribution worth chain and proudly owning these property helped us vertically combine and seize a bigger portion of the general gas distribution margin.
Should you have a look at our midstream acquisitions and tasks, they’ve all been a part of an built-in play. The sphere distribution enterprise helps maintain the terminals at the next utilization price and the terminals present our discipline distribution enterprise additional capacity to develop. Financially, we executed these transactions at very enticing valuations, particularly after including synergies. On the sphere distribution facet, we’ll proceed to develop organically in addition to capitalize on acquisition alternatives. Let me shut by stating that our present and future progress plans will construct on our historical past of sustaining monetary self-discipline, which implies defending the safety of our distributions whereas additionally defending our stability sheet.
Operator that concludes our ready remarks. You might open the road for questions.
Query-and-Reply Session
Operator
Thanks. Presently, we can be conducting a question-and-answer session. [Operator Instructions] Our first query comes from Theresa Chen with Barclays. Please proceed along with your query.
Theresa Chen
Good morning and thanks for taking my questions. I would like to ask a few extra questions of clarification on the economics associated to the Gladieux acquisition. So possibly first, going again to that 7x a number of with synergies. Are you able to share with us what the LTM a number of was? And from there to attending to 7x, are you primarily taking a look at value synergies as in case you’re paying a third-party terminal proper now, you possibly can take these volumes and put them by way of your captive system? Or are they, partially, income associated, will you have the ability to promote further product because of this acquisition?
Dylan Bramhall
Sure, Theresa, thanks to your query. Let me begin off a little bit bit concerning the economics, after which I am going to let Karl stroll by way of a little bit bit extra element on the synergies right here. Sure, that 7 or sub-7, which is mostly a sub-7 as soon as we get full synergies up and operating right here. There’s solely a really modest quantity of synergies actually getting us there. We’re not an excessive amount of larger than that on a a number of foundation proper out of the gate. However the synergies actually are it’s a mixture of type of the assorted actions that we undertake on these. And so, Karl, do you wish to give a little bit extra element on this?
Karl Fails
Sure, positive. Thanks, Dylan. Should you have a look at it, Gladieux was working as a separate firm. So there clearly are some expense synergies we’ll get simply by folding that into our operation. the transmix enterprise is mostly a regional enterprise the place you’ve got transmix that’s type of aggregated by way of the availability chain, a mixture of gasoline and diesel after which the transmix plant separate it again out. So this actually serves the Midwest a part of the nation and is an efficient match for us. There are some industrial alternatives the place, as Joe talked about in his ready remarks, having bodily property is an efficient match with our gas distribution enterprise and gives a platform for us to develop. We have already got some Midwest enterprise, not as a lot as in Indiana. So this needs to be a superb alternative for us to develop that.
Theresa Chen
Thanks. And I would additionally prefer to observe up on a few of Joe’s feedback concerning the first quarter outlook. I perceive that demand has bounced again and stays resilient, though we’re in what looks like a relentless upward tackle wholesale gasoline costs, which generally is inversely correlated along with your margins. But additionally perceive that breakeven margin the ground is larger because of the dynamics that you’ve got mentioned. I used to be questioning, within the first quarter, you sometimes get that annual 7-Eleven make-up fee and because it displays 2020 – I am sorry, 2021, and that is over now, are you able to share with us how a lot you count on from that and what sort of enhance to the CPG that may very well be?
Karl Fails
Sure. Certain, Theresa. On the 7-Eleven, as you identified, we get that make-up fee on the finish of the primary quarter. And if – it is actually associated to general volumes. So I’d say it is going to be nearer to the fee we acquired in 2020 than the one we acquired final 12 months. So far as your touch upon general first quarter outlook, the one factor I would add to what Joe and I stated within the ready remarks is clearly the market gives some headwinds because it rises, however there was a good quantity of volatility alongside the best way, which I discussed contributed positively within the fourth quarter. In order that helps us with a few of our gross revenue optimization methods, ship extra strong outcomes even within the face of a few of these upward actions.
Theresa Chen
Thanks.
Operator
Our subsequent query comes from Gabe Moreen with Mizuho. Please proceed along with your query.
Gabe Moreen
Good morning everybody. If I can simply observe up on the transmix acquisition, are you able to simply discuss contractually how that is structured when it comes to fee-based versus commodity, any commodity sensitivity, appreciating that you could be be hedged naturally additional downstream? After which additionally from, I suppose, the transmix provide standpoint, type of how lengthy do the contracts run with, I feel, a few of these pipelines? And is there any competitors within the space?
Karl Fails
Sure, Gabe, thanks for the questions. The transmix processing enterprise is, I would say, you are taking a margin on the processing. It is not likely a fee-based. However it’s actually steady as a result of many of the transmix that we bought, we bought at a reduction to gasoline and diesel. So once you’re truly buying the product on a pricing construction tied to what you are going to make, you possibly can think about how that gives extra stability. So far as competitors, actually, there are, name it, a few dozen transmix processing vegetation throughout the nation and generally transmix is processed in refineries with different feedstocks. And so I feel, naturally, the enterprise has constructed as much as the place you’ve got these vegetation unfold out and located the place transmix aggregates. So in idea, sure, there could be competitors, however actually, that is the premier Midwest transmix operation.
Gabe Moreen
Nice. Understood. After which possibly if I can simply observe up when it comes to that. I feel the nonfuel margin for 4Q ticked up fairly properly relative to prior quarters. Is there something type of happening there within the numbers?
Scott Grischow
Sure, Gabe, that is Scott. Sure, what is going on on there may be actually the contribution from the NuStar acquisition. So, all the terminaling charges, throughput charges, et cetera, flowing into that, which weren’t there within the third quarter.
Gabe Moreen
Acquired it. Okay. Thanks guys.
Operator
[Operator Instructions] Our subsequent query comes from the road of John Royall with JPMorgan Chase. Please proceed along with your query.
John Royall
Hello, good morning guys. Thanks for taking my questions. Most of mine have been requested. So, only one follow-up on the 7-Eleven make-up fee that you just guys are fairly clear on the expectations for this quarter. I am simply pondering into subsequent 12 months. So the 1Q 2023 fee, provided that your quantity steerage stays under pre-pandemic ranges and you have some acquisitions in there. I feel it is honest to imagine from the steerage that we needs to be seeing a fee subsequent 12 months as properly. Is that affecting to be modeling?
Karl Fails
Sure, John, I feel that is an affordable expectation.
John Royall
Okay. That was all I had. Thanks.
Karl Fails
You wager.
Operator
Our subsequent query comes from Selman Akyol with Stifel. Please proceed along with your query.
Selman Akyol
Thanks. Good morning. Simply needed to observe up on the acquisition. As I stated there, I have a look at it, your tankage there may be like 30x plus your throughput. Was all of that – did it have a excessive utilization as you look again during the last 12 months? Or are you pondering you would possibly have the ability to enhance utilization on the tankage to your distribution?
Karl Fails
Sure, Selman, I feel you have a look at tankage related to transmix processing and the terminal related to it. There’s a few of that the place you are going to combination and possibly even segregate some totally different flavors of transmix, possibly segregated by sulfur content material. In order that makes use of among the tankage. And the remainder of the tankage, sure, as you level out, is actually on us commercially to have the ability to optimize. And I would say, I will not essentially remark as a lot on the earlier operation. However clearly, we really feel that that is a robust swimsuit of ours is with the ability to reap the benefits of industrial alternatives. And like I stated earlier, hopefully, develop our gas distribution enterprise to all issues being equal, sure, I feel we’ll discover worth in that.
Selman Akyol
All proper. After which only one little factor there. Is there additionally room there for growth then in case you needed to extend your tankage there?
Karl Fails
There’s some room, if that is sensible.
Selman Akyol
Okay. All proper, thanks, Karl.
Karl Fails
Thanks, Selman.
Operator
Our subsequent query comes from Elvira Scotto with RBC Capital Markets. Please proceed along with your query.
Elvira Scotto
Hello, good morning. Only one query from me. Simply I would love your ideas on – with gasoline costs excessive, general inflation, type of pinching the patron. Would love your ideas on how you consider potential demand destruction? And I do know the breakeven margins are larger, so if volumes go down for SUN, however simply broader macro ideas round that.
Karl Fails
Sure, Elvira, that is Karl. I am going to share a number of ideas on gasoline costs and possibly inflation basically. I imply the primary one you already commented on is that in some ways, the inflationary pressures are pass-through in that they elevated the breakeven margins and for our enterprise mannequin. It actually gives stability. The opposite part from our standpoint is it truly is taking a look at it on a relative degree. And so we take into consideration the dimensions and scale that we convey to the desk actually permits us within the face of these to possibly even seize a little bit bit extra margin than among the opponents.
So far as the macro push, I would say in – or the macro look, within the short-term, we do not see a big effect on demand however clearly, larger costs, historical past has proven that larger costs can change discretionary journey or selections like that. We’ve not seen plenty of that. In actual fact, we expect there’s some pent-up demand as we go into spring and summer time, identical to we noticed final 12 months, that is what we’re anticipating. However the true reply there may be how lengthy and the way excessive the sustained costs are. So my crystal ball will not be excellent in that space, however we’ve not seen something within the short-term.
Elvira Scotto
Nice. Thanks very a lot.
Karl Fails
You wager.
Operator
Our subsequent query comes from Ned Baramov with Wells Fargo. Please proceed along with your query.
Ned Baramov
Hello. Good morning. Thanks for taking the query. Now that you’ve got operated the NuStar and Cato property for a number of months, may you possibly discuss potential funding alternatives in and round these property?
Karl Fails
Certain, Ned. That is Karl once more. You heard me point out on final quarter’s name that, if something, we had recognized possibly a number of extra alternatives since we gained possession than we initially had deliberate on. That is nonetheless true. I am going to say there is not any sizable or materials funding or alternatives. They’re all incremental on the margin, however usually constructive relative to what we initially assumed.
Ned Baramov
Acquired it. After which only one clarification on the transmix deal. Is the transaction instantly accretive or accretive within the first 12 months of operation?
Dylan Bramhall
Sure. It is instantly accretive. Like I stated, coming proper out of the gate, we’re type of sub-8x a number of earlier than synergies. And so we’ll begin choosing up accretion day one on this acquisition.
Ned Baramov
Nice. Thanks. That is all I had.
Operator
We’ve reached the top of the question-and-answer session. I’ll now flip the decision again over to Scott Grischow for closing feedback.
Scott Grischow
Properly, thanks for becoming a member of us on the decision at present. As all the time, please be happy to achieve out with any questions. Have an awesome day.
Operator
This concludes at present’s convention. You might disconnect your traces right now and we thanks to your participation.