Q3 2024 Sunoco LP Earnings Call
Speaker Change: Greetings and welcome to Sonako's LP's third quarter 2024 earnings call.
Speaker Change: at this time, all participants are an innocent only mode.
and the President. Should anyone require operator assistance during the conference, please press star 0 on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Scott Grischow, Senior Vice President, Finance, and Treasurer. Thank you, you may begin.
Scott Grischow: Thank you, it's been morning, everyone. On the call with me this morning, or Joe Kim, Snow Girl, peace president and chief executive officer, Karl Fails, chief operations officer, Austin Hartness, chief commercial officer, Brian Hanche, sales officer, and Dylan Bramhol, chief financial officer.
Today's call will contain forward-looking statements that include expectations and assumptions regarding the partnerships, feature operations and financial performance.
Speaker Change: Actual results could differ materially and the partnership undertakes no obligation to update these statements based on subsequent events.
Speaker Change: Please refer to our earnings release as well as our filings with the SEC for a list of these factors.
Speaker Change: Please refer to the Snook LP website for reconciliation of each financial measure.
Speaker Change: The third quarter brought a continuation of Sunoco's strong financial and operational performance throughout 2024. The partnership delivered record third-quarter adjusted EBITDA of $470 million, excluding approximately $14 million of one-time transaction expenses.
Speaker Change: In the third quarter, we spent $67 million on growth capital and $26 million on maintenance capital. In addition, on August 30th, we closed on the previously announced acquisition of a liquid fuels terminal in Portland, Maine.
Speaker Change: Third quarter distributable cash flows adjusted was $349 million, yielding a current quarter coverage ratio of 2.3 times and a trailing 12-month ratio of 1.9 times.
Speaker Change: On October 28th, we declared an $0.8756 per unit distribution consistent with last quarter.
Speaker Change: Our liquidity position and balance sheet remained strong. At the end of the third quarter, we had approximately $1.4 billion of liquidity remaining on our revolving credit facility.
Speaker Change: Leverage at the end of the quarter was four times, in line with our long-term leverage target.
Speaker Change: I would like to conclude by stating that we are confident in our ability to meet our 2024 EBITDA guidance range. Our financial position remains strong, enabling us to pursue growth opportunities while maintaining a healthy balance sheet and targeting a secure and growing distribution for our unit holders.
Speaker Change: With that, I will now turn it over to Karl to walk through some additional thoughts on our third quarter performance.
Karl Fails: Thanks, Scott. Good morning, everyone. Our results this quarter highlight the strength of our business and the benefits that come from the new additions to our portfolio. Let me now walk through our segment results and provide some additional perspective on each segment.
Speaker Change: Starting with our fuel distribution segment, we had a very strong quarter. Adjusted EBITDA for the segment was $253 million, up 3% from the second quarter, and up 8% over the third quarter of last year.
Speaker Change: We distributed 2.1 billion gallons, down 2% versus the second quarter, and up 1% versus the third quarter of last year.
Speaker Change: Reported margin for the quarter was $0.128 per gallon, compared to $0.118 per gallon in the second quarter, and $0.125 per gallon for the third quarter of 2023.
Speaker Change: If you zoom out from quarterly results, the basis of our fuel profit optimization strategies is to evaluate our fuel distribution business on total fuel profit dollars rather than volumes and margins separately.
Speaker Change: We have a demonstrated record of increasing our volumes by growing our market share. Higher break-evens across the industry have led to higher average margins. These factors have led to consistent growth in fuel profit dollars year after year, and we expect that to continue going forward.
Speaker Change: compared to $111 million for the second quarter.
Speaker Change: On the volume side, we reported nearly 1.2 million barrels per day of throughput.
Speaker Change: These numbers are not directly comparable to the second quarter for two reasons. First, the NuSTAR acquisition only contributed two months of volume in the second quarter. And second, beginning in the third quarter, volumes from our Permian assets are not included since they are now part of our JV with energy transfer.
Speaker Change: During the third quarter, our volumes and revenue were impacted by extended maintenance activity at two refineries connected to our pipelines in our Southwest and MidCon regions. Excluding those impacts, overall performance of the segment was solid, and we expect a stronger fourth quarter with those turnarounds behind us, as well as higher seasonal demand in our MidCon region.
Speaker Change: Let me take a minute and share some additional thoughts on the Permian-JV with energy transfer.
Speaker Change: The joint venture is making good progress in integrating the combined systems and has begun executing on synergies and growth opportunities that will drive additional value.
Speaker Change: We remain very excited about the deal, as it will drive additional growth and perform better in any market condition than what our Permian system would have been able to do on a stand-alone basis.
Speaker Change: Moving on to our terminal segment.
Speaker Change: Adjusted EBITDA for the third quarter was $70 million excluding $3 million of transaction expenses compared to $43 million in the second quarter.
Speaker Change: We reported nearly 700,000 barrels per day of throughput up from the second quarter, primarily due to a full quarter of contribution from legacy New Star assets.
Speaker Change: Our combined portfolio performed well with throughput and storage revenues in line with expectations.
Speaker Change: I'm pleased to share that we are done with the NuSTAR integration. All major integration efforts have been completed and we have already delivered the majority of the cost synergies into our run rate business.
Speaker Change: We are well on our way in executing the commercial synergy plans that have been identified.
Speaker Change: We remain confident that we will deliver on our commitments of $125 million of synergies in 2025 and $200 million in 2026. These are on top of the $60 million in annual financial synergies that we have already realized.
Speaker Change: Even with a larger portfolio of business, our focus remains the same.
Speaker Change: strong operational execution, expense discipline, commercial creativity, and profit optimization, and ensuring we deliver strong returns on capital that we deploy. I will now turn it over to Joe to share his final thoughts. Joe?
Joe Kim: Thanks Karl, good morning everyone. We delivered a very strong third quarter. Our business continues to deliver quality results quarter after quarter.
Joe Kim: Although 2024 is not quite over, we expect to have another record year and deliver on full year EBIDTA guidance. Let me put some perspective on this achievement.
Joe Kim: All three of our business segments are performing well. Our fuel distribution segment continues to grow and deliver outstanding results.
Joe Kim: We have grown volume and fuel profit dollars even with the divestment of our West Texas business earlier this year and a U.S. macro environment that has seen a decrease in year-over-year demand.
Joe Kim: As for the pipeline systems and terminal segments, our continued growth in critical midstream infrastructure has provided us with material diversification and further income stability.
Joe Kim: The strength of both segments is reflected in our 2024 results.
Joe Kim: And finally, our acquisitions, along with our growth capital, are delivering value-creating results.
Joe Kim: The New Star acquisition was obviously the biggest. We set very high expectations, both internally and externally. We're very confident that we will, at a minimum, meet these high expectations.
Joe Kim: Last quarter, we detailed the Synergy Guidance. We're well positioned to deliver on these Synergy Targets this year, next year, and beyond.
Joe Kim: Our entry into Europe has gone very well. We like the stability of the income streams that each location provides. We're confident that these assets will remain highly valuable for decades to come. Bottom line, 2024 will be another very strong year for Sun.
Joe Kim: As for next year, we expect more of the same. This December, we'll provide a new investor presentation, which will include our formal 2025 guidance and business outlook. I'd like to preview a few key themes.
Joe Kim: The outlook for all three of our business segments remains very strong. We expect industry fundamentals to remain highly supportive, and we expect to deliver on the new star acquisition synergies.
Joe Kim: When you put it all together, we expect to deliver another record year.
Joe Kim: We will continue to be a growth company. We have a proven record of delivering on growth opportunities.
Joe Kim: We have had more than seven consecutive years of growth in DCF per LP unit, and we expect this to continue.
Joe Kim: And finally, we're positioned to once again increase our distribution early next year and for years to come, all this while maintaining strong coverage and leverage ratios. Operator, that concludes our prepared remarks. You may open the line for questions.
Speaker Change: Thank you.
Speaker Change: We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Speaker Change: One moment please while we poll for questions.
Speaker Change: The first question is from Teresa Chen from Barclays. Please go ahead.
Teresa Chen: Good morning. Great to see the strong results in general and the strong fuel margin especially.
Teresa Chen: I understand you had previously amended the long-term range following the re-segmentation. Just with this result though, and more empirical data from the combined assets and the strength demonstrated, can you provide some additional color on your views on fuel margins going forward?
Speaker Change: fuel profit over the long run.
Speaker Change: In terms of, you know, what delivered the quarter in our margin view going forward, I mean, you know, as Karl shared in his remarks
Speaker Change: And there were commercial opportunities that presented themselves by the market that the team was able to execute against. So it's never one thing that delivers the quarter. In terms of our view going forward, I mean, I think a lot of the macro fundamentals in terms of elevated break-evens remain in place, and I think they're going to remain fairly sticky.
Joe Kim: but we're bullish going forward in terms of margin. Now, are we going to print record margin, record adjusted EBITDA quarter after quarter? That might be a bit of a stretch, but I think what is reasonable to expect and I think what our track record would suggest is that we're going to continue to grow fuel profit on a going forward basis on a trailing 12-month period.
Speaker Change: Thank you for that nuanced answer.
Speaker Change: Turning to the broader landscape, I would be remiss not to bring up the election. Following the results, what are your views on how the apparent Trump victory impacts your business or changes the landscape of the industry in general?
Speaker Change: how the street has responded, investors have responded to that.
Speaker Change: Secondly, for sun, I think it's without question this is positive for sun.
Speaker Change: And for the industry as a whole. So I think all things considered, it was a very positive event for sun in the sector going forward. I would add one other perspective from a sun side is that if you look at it over a longer landscape and longer time period,
Speaker Change: We've performed well within various administrations and you sprinkle in COVID and other macro factors. And I think there's a good reason why. Our business is resilient because
Speaker Change: We perform critical functions and we own critical infrastructure that keeps America healthy and moving forward. And I think we've also demonstrated our ability to evolve, execute, and grow on a going forward basis. So, all things considered, we're in a better position today and we feel very, very strong about our future going forward.
Speaker Change: Thank you.
Speaker Change: The next question is from Jeremy Tunnett from JPMorgan Chase & Company. Please go ahead.
Speaker Change: Hey, this is Noah Katz on for Jeremy. Thanks for the question. First, I wanted to touch on your capital allocation priorities with Sun continuing to decrease leverage this quarter to four times. What are your thoughts on weighing repurchases versus dividend raises or continuing to lower leverage? I think you said you're planning on raising the dividend early next year, earlier on this call. Thanks.
Speaker Change: are leveraged back to our long-term target at four times. And we were able to accomplish that within six months following close. Recall that we had given ourselves a 12- to 18-month time frame to do that. And I really think that's a result of some of the things we talked about today.
Speaker Change: strong performance of the base business, our ability to harvest synergies quicker and at a greater extent that we had originally talked about with the new star acquisition.
Speaker Change: And so protecting the balance sheets remains a core component of the capital allocation strategy. That said, now that we have achieved our long-term target, we can begin to refocus on the other two elements of our.
Speaker Change: Capital Allocation Strategy, which is returning capital to our unit holders. As Joe said, we expect to have announcements there early next year regarding future distribution increases and see this really as a multi-period, multi-year outlook for distribution increases.
Speaker Change: And then, in conjunction with that, the other component of our capital allocation strategy is continuing to remain a growth company, and as Karl and Joe both said,
Speaker Change: You know, I think we have a couple areas to focus in that regard as well, our organic growth capital program, as well as continuing to look at acquisitions both in the fuel distribution and midstream space.
Speaker Change: As it relates to unit repurchases, that is, it's hard, a capital allocation decision as well. And from our standpoint, we see the best return to our unit holders coming in the form of returning capital to them through distribution increases and continuing to reinvest in the business in accretive growth projects.
Speaker Change: Thank you. Bye.
Speaker Change: Thanks for that. That's helpful. And then as a quick follow up, I think you guys spoke about a little bit earlier about the fuel distribution trends you're seeing going forward and your thoughts on it, but I'm curious about your initial thoughts into 2025, given the trends you're seeing thus far into the fourth quarter. So any color here would be helpful. Thank you.
Austin Hartness: Yeah, no, this is Austin. You know, I touched on our margin view with Teresa's question, but just to kind of switch over to the volume side of the equation, I think
Speaker Change: Our view over the next 6-12 months is that demand for refined products is going to roughly mirror the last 6-12 months, which if you're tracking the EIA, what that means is on the gasoline side, roughly flat on a year-over-year basis, there's been some slight strengthening over the last couple of months.
Speaker Change: with ULSD being a touch softer than that. In terms of our view and what that means for Sun, we're well prepared to execute and deliver in that environment, but if our assumptions are off and demand comes in below expectation,
Speaker Change: Using history as a guide, that would create a pretty constructive margin environment. And I think our track record suggests that we're well positioned to execute and take advantage of the opportunities that would present themselves, should that be the case.
Speaker Change: And then on the flip side, if demand exceeds our expectations, we have an asset base and portfolio of income streams and a team that's wired to take advantage of those opportunities as well. So we're very pleased with that.
Speaker Change: We're pretty bullish about the fuel distribution business, both obviously with the Q3 print and what the near-term and long-term look like for the business.
Speaker Change: Thank you.
Speaker Change: The next question is from Gabe Marine from Mizuho. Please go ahead.
Gabe Marine: Hey, good morning everyone. First, I want to start out with a two-parter on some of the legacy New Star assets with some refinery closure announcements announced in California. Just wondering...
Gabe Marine: How you feel that may impact the legacy New Star assets in California? Then also competitors come out and announced a big expansion to the Denver markets Which I also believe connects to one of the legacy New Star refined products assets, so just wondering if that additional competition could have any impact
Karl Fails: Yeah Gabe, this is Karl. I'll start with with California. Clearly there's been a talk among energy companies doing business there on the challenges of the regulatory environment and some of the additional requirements that are being put in place.
Speaker Change: With our asset base
Speaker Change: We think, if anything, there's upside, not downside to that.
Speaker Change: you know, the energy demand in that state is going to continue to grow and whether it's...
Speaker Change: you know traditional hydrocarbons or whether it's you know a lower carbon version or renewable diesel. Our assets are really...
Speaker Change: well positioned to be able to provide that storage and critical infrastructure to enable that to happen. So anyway, we're really pleased with our assets in California, kind of regardless of what the future looks like.
Speaker Change: You talked about other competition in some of our other areas, and here's what I'd say is...
Speaker Change: Our asset base is really good and we think generally
Speaker Change: It's set up to
Speaker Change: center-of-the-country kind of projects or assets, and we don't see that demand profile really changing over the near term or even beyond that.
Speaker Change: I think I'll go back to one of the things Joe said earlier. You know, even if there are changes, we have a really creative commercial team and we're going to find some way to utilize those assets and deliver more value to the customers. So I think in both those cases, they're either neutral to positive on our outlook.
Speaker Change: Thanks Karl and maybe if I can follow up, again another Legacy New Star question, their Corpus Christi assets which I don't believe are in the JV with energy transfer, I think the big contract with Traffic Europe is coming up soon so I'm just wondering to what extent your expectations may or may not be shifting around renewing that.
Speaker Change: Yeah, so you're correct, our South Texas crude assets are not in the joint venture with energy transfer.
Speaker Change: I think we take maybe a little different approach on these kind of questions than maybe Newstar did in that
Speaker Change: We traditionally don't talk publicly about individual contracts with customers.
Speaker Change: And so I'd expect that going forward more out of our
Speaker Change: We think, if anything, it gives us more opportunity commercially to keep those discussions private with our counterparties.
Speaker Change: With that being said, there are opportunities, some of the synergies that we've identified in NuSTAR is we think we could better utilize some of those assets. Clearly there's always recontracting risk and you might change from one customer to another customer.
Speaker Change: Our Corpus Christi terminal is a really good terminal, and our business development teams are working on that, and we expect that to continue to be a good terminal for us going forward.
Joe Kim: Hey Gabe, this is Joe. Let me add one thing on top of everything Karl said.
Joe Kim: In my prepared remarks, I mentioned that in December, we're going to give guidance about 2025 and our outlook going forward. You brought up three good points about the refinery closure in California, the expansion into Colorado, and South Texas.
Joe Kim: There's always going to be.
Joe Kim: commercial situations going positive negative but I think whenever we provide the full details in December I think what the market is going to take very clearly from us is that we're very bullish on all three of our segments from field distribution to the pipeline system to our terminal system out there so when you put it all together we're going to have a great year in 2024 and 2025 we're going to get very strong guidance because we're very confident about our business in all three segments
Speaker Change: Great. Thank you, Joe. Thank you, Karl.
Speaker Change: Thanks, Gabe.
Speaker Change: Thank you.
Speaker Change: As a reminder, to ask a question, please press star 1.
Speaker Change: The next question is from Ned Baramov of Wells Fargo. Please go ahead.
Ned Baramov: Hey, good morning. Thanks for taking the questions.
Ned Baramov: Earlier this summer, the D.C. Court of Appeals ruled in favor of the Liquid Energy Pipeline Association, and the ruling allows FERC-indexed liquids pipelines to possibly retroactively recoup earnings on previous years' tariffs, which are now considered to have been
Ned Baramov: too low. So can you maybe just walk through the potential implications to Sunoco from this ruling?
Speaker Change: Sure, Ned.
Speaker Change: I won't give a lot of detail because this is still an ongoing issue, but I can give you our perspective on it. And so, first...
Speaker Change: We clearly support the D.C. Circuit decision on the rate index issue.
Speaker Change: You know, I'll reiterate what Joe just said, our asset base is strong, our 24 is strong, our 25 is going to be stronger. And as we continue to deploy capital in a profitable manner, you know, we'll continue to grow beyond that.
Speaker Change: Thanks for this Karl and then I appreciate the high-level preview of what to expect in December. Can you maybe give us a little bit more specifically will there be new metrics as part of your guidance such as maybe segment EBITDA or maybe a longer term EBITDA target for the business?
Speaker Change: Hey Dave, this is Joe.
Joe Kim: Here's what we have right now. We're a month away So I would ask the street to be just moderately patient since we're talking days instead of months from Providing full details on it and I think on my prepared remarks. I talked about the themes It's going to be a really strong year as far as exactly what elements we're going to provide in guidance
Joe Kim: We have it all, we just have to figure out what's the best way to give clarity to the market on a going forward basis without flooding the market with too much information where it becomes even more confusing. So we'll have a very thoughtful, clear viewpoint about 2025 and it's only days away versus months away and I think you'll be, I think you and the market will be happy to see our bullishness about our business going forward.
Speaker Change: That's right, I look forward to December. Thank you.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: This concludes the question and answer session. I would like to turn the floor back over to Scott Grischow for closing comments.
Scott Grischow: Thanks for joining us on the call this morning. As always, feel free to reach out with any questions and we look forward to catching up with everyone soon. Have a great day.
Speaker Change: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
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