Sunoco LP's Stock Surges on Major Asset Sale Announcement

By Tyler Crowe Markets Fool.com

What happened

Continue Reading Below

Shares of wholesale and retail fuel distributor Sunoco LP (NYSE: SUN) are up 14% as of 12:06 p.m. EDT today, on the heels of the company's announcement that it will sell its wholly owned convenience stores to the parent company of 7-Eleven.

So what

According to the corporate announcement, Sunoco will sell 1,110 of its wholly owned convenience stores to 7-Eleven for $3.3 billion plus fuel, merchandise, supplies and other inventories at the closing of the transaction. Also, as part of the deal, Sunoco will be the exclusive wholesale supplier of fuel for those locations as well as additional 7-Eleven locations. The deal in question will not include any of Sunoco's franchise locations across the country.

Image source: Getty Images.

Also, as part of the announcement, Sunoco said it plans to divest its remaining wholly owned convenience stores in Texas, Oklahoma, and New Mexico. The only convenience stores it plans to retain are its 54 Aloha-branded stores in Hawaii.

Continue Reading Below

The $3.3 billion in proceeds from this transaction will be used to pay down debt and general corporate purposes. Management expects the deal will reduce the company's leverage ratio to the 4.5-4.75 range (today it stands at 6.5). Once the deal is complete, and Sunoco resets its debt levels, it will allow the company to pursue growth in the wholesale business.

Now what

Thistransaction marks a pretty significant shift for Sunoco. In some sense, this needed to happen to clean up the company's balance sheet. It was already in trouble with its creditors, as its debt ratio was getting out of hand. However, this deal also eliminates one of the few avenues for growth in this business. It wasn't that long ago that building out its wholly owned retail network was a core part of Sunoco's growth strategy.

In the shorter term, this deal makes a ton of sense as it forces the company to focus on just being a wholesale fuel distributor and generating long-term, fixed-fee revenue from supply agreements. Longer term, though, it does constrain Sunoco's growth options. If you are looking for a very high yield with little growth, then this move certainly makes Sunoco more attractive, but don't expect massive payout increases in the future.

10 stocks we like better than Sunoco
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Sunoco wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of April 3, 2017

Tyler Crowe has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.