Energy Transfer Partners LP (ETP)

[Enterprising Investor]

ETP to Buy Sunoco for $5.3 Billion (4/30/12)

By TOM FOWLER and BEN LEFEBVRE
Energy Transfer Partners LP, which operates natural-gas pipelines, will pay $5.3 billion to acquire refiner Sunoco Inc. in a deal that would expand its pipeline system into the more lucrative oil sector.

Energy Transfer is trying to build an oil-transportation business and cut its exposure to the natural-gas industry, where overproduction has helped push prices to 10-year lows.

The key assets for Energy Transfer in the deal are Sunoco's 7,900 miles of crude-oil and refined-fuel pipelines, which will give the Dallas-based company a toehold in the Marcellus and Utica Shale regions in Pennsylvania and Ohio. Those areas are becoming important sources of oil and "gas liquids" such as butane and propane, which fetch higher prices than natural gas. Energy Transfer currently has gas-liquids pipelines but not oil pipelines.

Less attractive to Energy Transfer is Philadelphia-based Sunoco's refining business, which has posted losses for the past two years. The refineries have suffered from mechanical problems and their dependence on imported crude, which has been priced much higher than domestic oil refined by competitors in the Midwest and Gulf Coast areas

Several Sunoco refineries have been sold or closed in recent years, while the Marcus Hook refinery near Philadelphia is being turned into a fuel-storage and transfer facility.

The only Sunoco refinery in operation, a 330,000 barrel-per-day facility in Philadelphia, may remain open if the company succeeds in creating a joint venture with the Carlyle Group that would transfer operations of the refinery to the private-equity firm. Carlyle would own a majority of the facility.

Sunoco will continue its plans for the proposed refinery joint venture being discussed with Carlyle, as well as continue plans for exiting the refinery business, an Energy Transfer spokeswoman said.

Energy Transfer will also gain Sunoco's chain of 4,900 gasoline stations.

Sunoco shareholders will receive either $50 in cash for every one of their shares, 1.049 Energy Transfer units or a combination of $25 in cash and 0.5245 Energy Transfer units. The cash option is a 23% premium to Sunoco's Friday closing price. Sunoco shares soared 20% to $49.29 Monday in New York Stock Exchange composite trading.

Energy Transfer's purchase of Sunoco was a surprise to many analysts because Sunoco appeared to be in the final stages of restructuring.

"You have to hand it to Sunoco," Morningstar analyst Jason Stevens said. "They positioned the company as a retail and logistics business, and Energy Transfer stepped up to the plate."

Kelcy Warren, chairman and chief executive of Energy Transfer, said the deal will increase the company's cash flow from the more lucrative oil and gas-liquids business to about 30% of total cash flow. The goal is to increase the oil-and-liquids side of the business to about 40% of cash flow, which can be reached by expanding existing gas and gas-liquids pipelines, he said.

Energy Transfer is also looking into converting two natural-gas pipelines to carry oil instead. The Trunkline pipeline currently moves natural gas from the Gulf Coast to the Chicago area, while the Texoma pipeline connects natural-gas processing areas in East Texas.

Energy Transfer expects to close the Sunoco transaction by the fourth quarter.

The deal is the second pipeline acquisition by the Energy Transfer partnerships in the past year. In December, parent partnership Energy Transfer Equity closed a $3.7 billion deal for Southern Union Group, making it the largest natural-gas transporter in the country.

Write to Tom Fowler at [e-mail] and Ben Lefebvre at [e-mail]

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