Up until a few months ago, there weren’t a whole lot of reasons to be hopeful about Sunoco’s (NYSE:SUN) stock. Then, management announced a major deal that has the potential to be a reset button for the company: It’s transitioning away from running filling stations and convenience stores, and focusing instead on its bread-and-butter business of wholesale fuel distribution.
The sale of most of the retail segment of the company will leave the company with a large pile of cash at its disposal. Here are a few quotes from the company’s most recent conference call that outline some of its most pressing issues, and how it plans use those new funds to alleviate them.
Distribution looking dicey
For a few quarters, Sunoco’s distributions to shareholders haven’t looked too stable, and the most recent was no exception. CEO Bob Owens tried to put the most positive spin possible on it.
This distribution was a 1% increase from Q1 of 2016 and resulted in a 0.74x coverage ratio for the first quarter and a 0.88x coverage ratio on a trailing 12-month basis. As a reminder, the first and fourth quarters are seasonally the weakest quarters of the year for our business, year in, year out. In the near term, we are comfortable keeping our coverage below the 1x. Long term, our goal is to manage to a 1.1 coverage ratio after the retail asset sales process is complete, aided by a combination of growing cash flow via acquisitions or reducing our distributable cash flow obligations through the repurchase of units, either in the open market or from Energy Transfer [Equity].
In three of the past four quarters, Sunoco hasn’t been able to cover its distribution with cash coming in the door. Even factoring in that Q1 and Q4 are always its weakest quarters, the company is still well short of what it needs on a trailing 12-month basis. This should send up a red flag for investors despite…