Philadelphia-based Sunoco Logistics Partners L.P. (SXL), a master limited partnership (MLP), acquires, owns and operates a geographically diverse portfolio of refined product and crude oil pipelines and terminal facilities. Its facilities are located in 17 states in the Northeast, the Midwest, the Southeast and the Southwest of the country.
Oil refiner and marketer Sunoco Inc. (SUN) owns 34% of the partnership interest, including a 2% general partner interest. Sunoco Logistics is organized into four segments – Refined Products Pipeline System, Terminal Facilities, Crude Oil Pipeline System, and Crude Oil Acquisition and Marketing.
We remain optimistic on the crude oil pipelines and terminals operator’s near-term prospects, supported by consistency in its earnings/cash flows, attractive fundamentals and a positive outlook. Sunoco Logistics currently retains a Zacks #1 Rank, which translates into a short-term Strong Buy rating. We are also maintaining our long-term Outperform recommendation on the stock.
The Catalysts
With its low-risk and stable cash flow-generating energy infrastructure assets, Sunoco Logistics offers investors an opportunity to capture income growth through steadily-rising cash distributions and capital appreciation.
We also believe that the partnership’s synergistic relationship with Sunoco Inc. is beneficial on two accounts. First, a sound fee-based relationship with Sunoco shields it from competitive pressures in the MLP space and provides it with stable cash flows and consistent top-line growth opportunities. Second, the partnership continues to leverage its relationship with Sunoco to make joint acquisitions.
The partnership has established a track record of consistent distribution growth – its current quarterly distribution of 47 cents per unit ($1.88 per unit annualized) is up from 15 cents per unit (60 cents per unit annualized) at the time of its 2002 IPO. Based on its financials, we trust that Sunoco Logistics’ current yield of more than 4% could be maintained even in periods of prolonged difficult economic environment.
Last year, Sunoco Logistics and fellow pipeline operator MarkWest Energy Partners L.P. (MWE) decided to expand their ethane pipeline project. The partnerships – which teamed up in June 2010 to build the ‘Mariner’ distribution system to transport ethane produced in the Marcellus Shale Basin to markets along the Gulf Coast – will now extend their partnership to allow for transportation of the gas to Canada.
Known as the ‘Mariner West,’ the proposed initiative is expected to begin its service by the third quarter of 2012. It will ship up to 65,000 barrels of ethane per day to Sarnia, Ontario markets to support additional ethane production in the Marcellus region. The Mariner West Project is backed by producer demand and assurance from Sarnia industrial customers.
We also like Sunoco Logistics’ recent acquisition of Texon L.P.’s butane blending business. The fundamental outlook for butane blending looks positive and we expect the business to offer organic growth opportunities, in addition to complementing the existing terminals business.
To Conclude
Overall, we believe Sunoco Logistics is favorably positioned to continue accelerating revenue/earnings growth over the next few quarters. Considering its leverage to high crude prices and the ever expanding demand for energy infrastructure, we believe Sunoco Logistics is in bargain territory.
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