Sunoco Shares Drop After $760 Million Deal With Vitol Group

  • Deal includes terminal, gathering system and SunVit Pipeline
  • Texas shale basin’s low costs continue to appeal to producers

Sunoco Logistics Partners LP shares plunged the most since March after an announcement that it’s buying a Texas pipeline network to expand its position in one of the few places in the U.S. where oil producers are still eager to drill.

The company paid the Vitol Group $760 million plus working capital for a Midland, Texas, crude terminal and a gathering system in the Permian Basin, according to a statement Monday. The deal includes Sunoco’s purchase of the 50 percent interest in SunVit Pipeline LLC that it doesn’t already own. The terminal has a capacity of 2 million barrels.

Investors were displeased as Sunoco shares dropped as much as 7.8 percent, and were down 4.8 percent at 1:13 p.m. in New York.

"The addition of the Vitol system is an excellent synergistic fit to our growing crude platform in the Permian Basin," said Chief Executive Officer Michael J. Hennigan in the statement. "The Permian Basin is the most prolific of all of the U.S. shale areas with strong growth expectations."

The deal deepens Sunoco’s presence in the oil basin that has been central to revived drilling and land deals among U.S. producers during the market downturn. The Permian, as one of the few areas where drilling is profitable at current prices, is considered prime real estate.

The expansion comes at a high price, Brandon Blossman, an analyst at Tudor Pickering Holt and Co., wrote in a note to clients. Increased exposure to the Permian is positive, he said, "but deal looks expensive near-term."

Boosting Drilling

As low energy prices made other areas unprofitable to drill, explorers as diverse as Apache Corp., Cimarex Energy Co., EOG Resources Inc. and Occidental Petroleum Corp. have been touting plans to expand their Permian assets. Closely held companies have boosted their rig count by 183 percent since May 20, according to Bloomberg Intelligence.

Sunoco will issue 21 million new shares to fund a portion of the purchase. The underwriter, Barclays Capital Inc., has an option to buy up to an additional 3.15 million shares, the company said. The equity offering, not conditioned on closing the deal, will be used for general purposes if the acquisition falls through.

Energy Transfer Partners LP and Energy Transfer Equity LP, owners of Sunoco Partners LLC -- the general partner for Sunoco Logistics -- will reduce the distributions that Sunoco Logistics must pay to that general partner by $60 million over two years. The decrease will be spread evenly over eight quarters beginning in the third quarter this year.

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