On May 30, 2013, we retained our Neutral recommendation on Philadelphia-based crude oil pipelines and terminals operator Sunoco Logistics Partners L.P. (SXL). Our investment thesis is supported by a Zacks Rank #3 (Hold).
Why the Reiteration?
Tepid demand for refined products and the difficult operating environment are key areas of concern, in our view. We also remain worried on account of cost overruns on expansion projects, which lead to lower returns.
Detailed Analysis
Recent results have been driven by strength in its crude pipeline system and terminals facilities. Importantly, the partnership has grown its cash distribution for 32 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 rising cash distributions and capital appreciation.
However, the actual amount of cash distributed to Sunoco Logistics unitholders may fluctuate and are directly exposed to the partnership’s future operating performance, which is susceptible to movements in margins and throughput volumes. Realized margins and/or volumes could differ significantly from our estimates, thereby affecting Sunoco Logistics’ cash distributions.
Moreover, weak refined products demand and refinery downtime – which adversely affects pipeline and terminal throughput – may present a risk to the cash flow estimates and lower Sunoco Logistics’ distribution growth rate.
Stocks that Warrant a Look
While we expect Sunoco Logistics to perform in line with its peers and industry levels in the coming months and advice investors to wait for a better entry point before accumulating units, one can look at Enbridge Energy Management LLC (EEQ), Enterprise Products Partners L.P. (EPD) and Kinder Morgan Energy Partners L.P. (KMP) as good buying opportunities. These energy pipeline partnerships – sporting a Zacks Rank #2 (Buy) – have solid secular growth stories with potential to rise from current levels.
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