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What Will Energy Transfer Partners Do With Sunoco's Gas Stations?


Analysts believe ETP will likely sell off Sunoco's retail assets.

MINYANVILLE ORIGINAL In April, pipeline company Energy Transfer Partners (ETP) announced that it will acquire fuel retailer and distributor Sunoco (SUN) for $5.3 billion.

ETP's primary aim in buying Sunoco is to own its 7,900 miles of crude and refined product pipelines and terminal assets, which thus enlarges ETP's scale. However, as part of the deal, ETP will also come into possession of Sunoco's branded network of 4,900 retail gas stations scattered through 23 states in the Northeast, Southeast, and Midwest, of which roughly a third are owned by Sunoco, with the others run by independent operators.

It's an odd fit – gas stations are clearly outside the core focus of ETP's management. Additionally, ETP is structured as a tax-friendly master limited partnership (or MLP), but merchandise from the gas station convenience stores do not qualify for MLP treatment, which may subject ETP to taxes.

There is also the fact that it is increasingly tough to turn a profit from running gas stations.

"Recent declines in gasoline consumption coupled with higher overhead costs and greater competition from warehouse clubs, such as Costco (COST), have resulted in declining profits for energy company-owned gas stations and those [that are] independently owned and operated," Alan Herbst, a principal at New York-based energy consultancy Utilis Advisory Group, tells Minyanville.

"With the retail markup for gasoline only about $0.15 per gallon, station owners had been relying on their convenience store sales to generate income, but now those sales are also declining."

Because of these reasons, oil and gas analysts believe that ETP should and will sell Sunoco's distribution network of 4,900 company- and independently-operated retail gas stations, which they value at around $1.8 billion.

"I don't think the Sunoco stations would be that profitable as a standalone business, but they could be acquired by another retail operator who is looking to expand their network," Herbst notes. "Firms that might have an interest might include Wawa and even the recently spun-off Marathon Petroleum (MPC)."
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