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MLP Weekly: Reversing Course

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Units advanced this week as the 2017 average crude and natural gas strip price rose above $53 and $3.40 respectively.  Transactional activity was robust as nearly $4.2B of drops down, divestitures, issuance and take outs were announced.   However, the majority of the transactions involved were to move assets out of the Master Limited Partnership structure.  First Quarter Distribution announcements are expected to pick up this week in advance of Q1 results which commence in late April.





Unit News



Sunoco LP announced a strategic shift in their business model, effectively exiting the Convenience store business, while retaining wholesale fuel distribution services to C-Stores.  The first step of their plan is the sale of 1100 stores to 7-Eleven for $3.3B, where Sunoco will continue to provide fuel to the 1100 East Coast and Texas stores under a 15 year take or pay agreement, starting at 2.2B gallons and increasing to 2.7B by 2021.  Management was not willing to divulge the EBITDA multiple of the transaction nor the expected EBITDA run rate post the transaction as they expect to sell the remaining stores, outside of Hawaii, in the next several months, and reduce administrative overhead.  Management commented that the goal of the transaction is to de-lever and provide a simpler, more consistent and predictable set of cash flows on an asset base offering opportunity for M&A consolidation.  This is a dramatic, but necessary shift for Sunoco, which in July 2015 purchased 680 Stripe stores for $1.93B, with about $960MM in new units issued by Sunoco to finance the transaction.  The nearly 23MM of new units generated Incentive Distribution Rights payments to Energy Transfer Partners, which owns the Sunoco IDR's, which will continue to pay ETP for assets now divested.   In November 2015, SUN paid $2.2B to Energy Transfer Partners, at an 8.5x trailing EBITDA multiple, to acquire the remaining Sunoco branded stores along with the the remaining interests in Sunoco LLC.  The company raised $750MM from the private placement of units at $31.00, and financed the remaining $1.5B with debt.  At the time of the acquisition, Management provided the following commentary 



Notwithstanding Sunoco's decisions to raise their distribution by 20% since Q3, 2015, their plan did not work out as expected as fuel and merchandise margins declined, leading to increased leverage and lower distributable cash flow coverage, which set the stage for this rather unexpected transaction.  Most expected a SUN distribution cut to address the immediate cash flow problem, which Management now says is off the table as a result of the announced, and expected, transactions. 






Although units jumped 21.64% for the week, the forward yield is still 11.22%, as the market is not clear on the bridge to the stated 1.1x DCF coverage and 4.50x-4.75x leverage targets Management outlined in the transaction call.  There is also a tax bill, expected to be in the "hundred's of millions" due upon the sale of the remaining assets.  Also noteworthy is the $150MM Growth and Maintenance Capex, post the transaction, are incentive payments made to current and future distributors.  




Tallgrass Energy Partners announced a deal to acquire an incremental 25% of the Rockies Express Pipeline for $400MM in cash, increasing their ownership to 50%.  Tallgrass will receive $75MM from the Ultra Petroleum settlement with REX for their 50% stake, no later than October 30th, 2017.  The purchase price was 10% lower than their previous 25% REX purchase in May 2016 from Sempra.  



World Point Partner's Sponsor announced a non-binding preliminary proposal to acquire the outstanding public units for $16.80 subject to 80% of the total units being tendered. Public issuance is approximately 27% with the remainder owned by WPT Inc and affiliates.  



Hess Midstream Partners priced 10% higher than the expected midpoint range, and closed 12.56% above the $23.00 IPO price as higher crude and DAPL improved the prospect for higher Bakken production volumes.  




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