Sunoco LP (SUN) is acquiring NuStar (NS) in an all-stock deal worth $7.3B. The transaction will impact earnings and, potentially, future options for SUN general partner Energy Transfer (ET).
SUN shares fell ~5% following the announcement last Monday (January 22), while NS shares jumped ~18%. NS shareholders will receive 0.4 units of SUN for each NS unit, indicating a ~24% premium to the pre-deal share prices.
In the latest Financial Blueprint and Earnings Preview for NuStar, East Daley forecasts FY24 EBITDA at $766MM, indicating a 9.5x multiple for the deal prior to synergies. Our forecast is 2% above consensus estimates and 5% above our FY23 forecast of $730MM. The asset breakdown in the Financial Blueprint shows NuStar’s Midland crude gathering system as the driver of our higher outlook, as well as rate increases for its two main refined products systems.
EDA highlighted NS as a potential take-out candidate in our 2024 Dirty Little Secrets annual outlook, though we expected a more traditional midstream buyer like Plains All American (PAA) or Energy Transfer (ET) to emerge. As it turns out, ET will be indirectly involved; ET wholly owns the SUN general partnership and has a 28% limited partner interest (pre-acquisition). 
In the post-deal investor call, SUN management threw cold water on the idea of engagement with ET, stating the acquisition was a “Sunoco deal” and not driven by potential opportunities with the partner. Nevertheless, the NS crude assets, particularly the Permian gathering system, fit well with ET’s Permian crude assets and could offer optimization opportunities to both companies.
Based on Texas state data, we estimate the ET Permian crude system already sends ~28% of its volumes to ET’s terminals and long-haul pipes in the region (see figure). If ET can leverage SUN/NS to grab a larger share of those gathered volumes, the company could boost earnings at its Permian Express Partners and West Texas Gulf pipelines.
The SUN-NS transaction also has direct implications for Energy Transfer’s earnings in the company Blueprint. ET fully consolidates SUN EBITDA as a separate segment, and receives ~$170MM of distributions from its GP and LP stakes. The NS assets will increase the company’s EBITDA and debt (ET also consolidates SUN’s debt on its balance sheet), as well as increase SUN’s IDR payments to ET by ~$50MM. Leverage will increase in the short term, but SUN expects leverage to decline to 4.0x within 12-18 months.
SUN expects the deal to generate 10% accretion to DCF per unit by the third year of the transaction, which is in line with our growth forecasts for NS and the projected synergies. Management noted ~$150MM in synergies, plus ~$50MM of savings from refinancing NS’ high-interest preferred equity and subordinated notes.
SUN noted the company has already seen commercial synergies from its previous acquisition of NS’ East Coast terminals, by increasing butane blending opportunities and using those terminals as an entry point to new markets. With NS’ pipeline assets, SUN could better source volumes for its distribution business, which in turn can keep utilization high at the NS assets.— Ajay Bakshani, CFA Tickers: ET, NS, PAA, SUN.
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