What happens to Sunoco's 4,900 gas stations after it merges with Energy Transfer Partners?
Though it is really Sunoco's pipeline affiliate that he covets, Kelcy L. Warren, the chief executive of the Texas pipeline company that is buying Sunoco Inc. for $5.3 billion, says he is "very comfortable" owning the iconic gasoline brand that has been a Philadelphia fixture for more than a century.
But many analysts say that ETP, which is based in Dallas, should unload Sunoco's retail marketing unit.
"Those guys are not into the retail business," said John R. Cusick, an analyst with Wunderlich Securities in Memphis, who follows ETP.
Energy Transfer Partners has received "a lot of inbound calls" about Sunoco's gas stations since the merger was announced on April 30, Martin Salinas Jr., the company's chief financial officer, told analysts this month. He added, however, that none of the inquiries had "any traction."
Sunoco's retail unit could be worth $1.8 billion, an analyst told a Wall Street Journal blogger this week. And the convenience-store trade press is abuzz with speculation about the prospect of 4,900 gas stations changing hands.
Analysts said potential buyers include Marathon Petroleum, a refiner that operates 5,100 outlets in 18 states; Montreal-based Alimentation Couche-Tard, which has 3,500 Circle K stores in the United States; and Global Partners L.P., which operates 800 fuel outlets in the Northeast under several brand names.
"We would be very interested in it, of course," Global Partners chief financial officer Thomas J. Hollister told investors.
If Sunoco's gas stations were sold, what would that mean to the legions of customers who buy 13.7 million gallons of Sunoco fuel every day?
A change of ownership would likely be invisible to customers. A new owner would continue to operate the stations under the 126-year-old Sunoco brand, which the company has heavily promoted through its sponsorship deals with NASCAR and IndyCar, which continue until 2019 and 2014, respectively.
"Sunoco has a good amount of brand recognition, especially in the Northeast," said Bradley Olsen, an analyst with Tudor, Pickering, Holt & Co.
In a memo to Sunoco employees, senior vice president Robert W. Owens, who has lead Sunoco's marketing unit for more than 10 years, encouraged the workforce to stay the course.
"Our day-to-day retail operations and marketing programs will not change," said Owens, who remains as head of the retail operations. "Energy Transfer views our business as a solid asset with great cash flow. It plans to own the business and ensure that we are maximizing our potential in the marketplace. As a result, we have a great opportunity to showcase our talent and demonstrate what we can do."
Of Sunoco's 4,900 stations, the company owns or leases about 900 (including 600 convenience stores), and operates only about 400 stations itself. The vast majority of Sunoco stations are distributors — essentially franchises — that Sunoco does not own, lease or operate.
Despite complaints from customers about high gasoline prices, the competitive retail fuel business is not very profitable. At convenience stores, fuel typically accounts for 75 percent of sales but only a quarter of the profits, said Jeff Lenard, a spokesman for the National Association of Convenience Stores.
"There's lot more money in the business from selling Slurpees and hot dogs than gasoline," said Olsen, of Tudor Pickering.
Sunoco's retail business earned $169 million in 2011 on $17.4 billion in sales, though it reported a loss for the first quarter this year when retailers could not raise prices fast enough to keep up with the relentless increase in the wholesale cost of gasoline. Profits improved in April after gasoline prices weakened, Michael J. Colavita, Sunoco's chief financial official said.
The cyclical nature of selling fuel explains why analysts accustomed to ETP's steady pipeline earnings are uncomfortable with taking ownership of thousands of gas stations.
"They're just not as stable as pipelines," Olsen said.
Some analysts also say Sunoco's retail business would not be a good fit with Energy Transfer because the pipeline company is structured as a master limited partnership, a tax-avoidance mechanism that complicates the ownership.
Master limited partnerships don't pay corporate taxes on their profits — the owners of the publicly traded shares, or units, are responsible for paying the taxes. But to qualify as an MLP under the tax code, the partnership must generate 90 percent of its income from sources such as producing or transporting oil and natural gas.
"Sunoco's retail business doesn't have qualifying income and doesn't fit in with an MLP," said Cusick, the Wunderlich analyst.
But other analysts say that Sunoco could continue to operate as a taxpaying corporation in the Energy Transfer family and pay its profits to the partnership in the form of a dividend without threatening Energy Transfer's tax-advantaged status.
Brian P. MacDonald, Sunoco's chief executive, told analysts that Sunoco executives had started to examine ways that Sunoco might be restructured to fit into an MLP structure but had reached no conclusions.