We are maintaining our 'Neutral' recommendation on pipeline operator Sunoco Logistics Partners L.P. (SXL) with a price target of $88.
Philadelphia-based Sunoco Logistics is a master limited partnership (MLP) that acquires, owns and operates a geographically diverse portfolio of refined product as well as crude oil pipelines and terminal facilities. Its facilities are located in 17 states in the Northeast, Midwest, Southeast and Southwest of the country. As of December 31, 2010, Sunoco, Inc. (SUN) owned 31% of the partnership interest, including a 2% general partner interest. Sunoco Logistics is organized into three segments – Refined Products Pipeline System, Terminal Facilities and the Crude Oil Pipeline System.
Sunoco Logistics owns a high-quality and diverse portfolio of midstream assets that generate stable and recurring revenues by way of long-term fee-based contracts. Over the last few years, the partnership has consolidated its position in the midstream business through organic efforts and accretive acquisitions. It is primarily engaged in crude oil and refined products transportation and storage, with a strong track record of distribution growth.
Recent results for Sunoco Logistics have been driven by the strength in its crude leasehold business. Importantly, the partnership has grown its cash distribution for twenty-four consecutive quarters. With its stable fee-based revenue, geographically diverse assets and strong business fundamentals, Sunoco Logistics offers investors an opportunity to capture income growth through steadily growing cash distributions and capital appreciation.
However, tepid demand for refined products and the difficult operating environment remain key areas of concern, in our view. The uncertain economic environment, coupled with reduced access to the credit markets, have led to lower spending by consumers and businesses on transportation fuels, such as gasoline, aviation fuel and diesel. This translates into less transportation volumes for pipeline operators like Sunoco Logistics, cutting away at its cash flows and distributions. We also remain wary of cost overruns on expansion projects, which lead to lower returns.
As such, we expect Sunoco Logistics’ growth potential to be restrained and see the units performing in line with the market. Our long-term 'Neutral' recommendation is supported by Zacks #3 Rank (short-term Hold rating).
SUNOCO INC (SUN): Free Stock Analysis Report
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