Double the combustion engine with this high output

There is strong pressure to switch from carbon fuels to cleaner alternatives, such as renewable energy. A major part of the effort is getting more electric vehicles (EVs) on the road. Automakers are getting on board, but even in the best-case scenario, the world will need gasoline for decades to come. Sunoco LP (NYSE: SUN)with a huge efficiency of 7.6%, is a way to play on the resilience of the petrol car.

The transition

Carbon dioxide is a greenhouse gas, and one of the main sources of this gas is the combustion engine that powers most automobiles. As ESG investors fight to reduce the amount of carbon dioxide produced by humans, moving away from gas-powered cars has been at the heart of the fight. Although electric vehicle news tends to be high-profile, in 2020 electric vehicles accounted for just 1.7% of car sales in the United States.

Image source: Getty Images.

Given that number, electric cars, as you might expect, are not yet a big factor in the US market. Now add to the mix the fact that the average gasoline-powered car has a useful life of around a dozen years, and you can see why gasoline will continue to play an important role for years to come. But what does it matter?

In the best-case scenario for electric vehicles, sales will explode to over 70% of vehicle sales by 2040. And, even then, gas-powered cars will still make up 56% of the US car fleet, according to Bloomberg. . New energy fuel forecasts. At the other end of the spectrum, the worst-case scenario is that electric vehicle sales will be in the lower single digits and electric vehicles will represent less than 5% of cars on the road in 2040, according to estimates from the US Energy Information Administration (EIA). Either way, gasoline will be needed in significant quantities. And if you think the bottom line is more likely to be down here, then gasoline-focused Master LP Sunoco is worth a closer look.

Gas in motion

Sunoco’s business actually breaks down into two segments, midstream and distribution. Intermediate operations focus on the movement and storage of refined products, especially gasoline. The partnership’s footprint on pipelines, terminals and storage here is essentially intended to overlap with its other business, gasoline distribution. This segment transports gasoline to convenience stores, independent dealers and commercial customers in 33 states. It has more than 10,000 customers. It also owns 78 gas stations in New Jersey and Hawaii, but that’s a relatively small part of the business.

Acquisitions are likely to be a key growth platform on both the midstream and distribution side of the business. Indeed, with 17 other states in which it can expand, Sunoco has ample room to grow. The partnership has made 10 acquisitions since 2014, so this is not a new approach. That said, Sunoco hit a low point in 2018, shortly after announcing plans to refocus on fuel distribution and logistics in April 2017. It has since increased its adjusted earnings before interest, taxes, depreciation and amortization (EBITDA). Basically, after a brief transition period, which included jettisoning the company-owned gas stations, he seems to have gotten the ship back in the right direction. Basically, the future here is likely to be smoother than the past when it comes to acquisitions and divestitures. It can also grow from within, attracting new customers to its gas distribution business and expanding its midstream assets through additional capital investment. For example, it currently has $150 million in capital spending plans in 2022 that it thinks it can self-fund.

SUN Dividend Table

SUN Dividend given by Y-Charts

To be fair, distribution hasn’t grown in several years despite the partnership’s acquisition efforts. The payout has been stuck at $0.8255 per share per quarter since 2016. However, this actually speaks to Sunoco’s commitment to unitholders. At first, the partnership was working to reduce leverage and increase its distribution coverage while changing its business model. When the pandemic hit gasoline demand in early 2020, Sunoco LP was ready for the headwind. During this difficult global period, the partnership’s distributable cash flow covered the distribution by more than 1.4 times. In the first nine months of 2021, coverage also exceeded this internal management target. Simply put, there’s plenty of room for adversity here.

The long term versus the here and now

Obviously, in the very long term, the gasoline-powered car seems to be headed for extinction. But it will likely take a long time for that to happen, and income-oriented investors can still generate generous cash flow from Sunoco as it continues to meet industry needs. It is not a low risk investment, knowing that it is controlled by Energy transfer, which has a history of taking an aggressive approach to its business that could, perhaps rightly, shake the confidence of more conservative investors. And owning Sunoco is pretty much the antithesis of investing in clean energy. However, if you’re a more aggressive type and willing to take a contrary stance, this could still present an attractive income opportunity now that its business transformation is in the past and the company is in a much better financial position. solid.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.

Kevin A. Perras