Crude oil pipelines and terminals operator Sunoco Logistics Partners L.P. (SXL) announced weaker-than-expected first-quarter 2011 results, adversely affected by soft performance from its ‘Refined Products Pipeline System’ segment on the back of significant unplanned refinery outages and lower demand across the system. The partnership’s diluted earnings per unit (“EPU”) came in at $1.08, below the Zacks Consensus Estimate of $1.31.
However, compared to the year-earlier period, Sunoco Logistics’ earnings per unit rose 1.9% (from $1.06 to $1.08) due to strong contributions from the crude pipeline system and terminals facilities. Revenues of $2,260.0 million were up 33.9% from the first quarter 2010 and also beat our projection by 5.8%.
Quarterly Distribution
Importantly, the partnership raised its quarterly distribution by 1.3% sequentially and 7.2% year-over-year to $1.195 per unit or $4.78 per unit annualized, representing the thirty-first expansion in the past 32 quarters. Distributable cash flow increased approximately 16.7% year over year to $63.0 million.
Segmental Performance
Refined Products Pipeline System: Operating income in the ‘Refined Products Pipeline System’ segment was $5.0 million, down 37.5% from the first quarter of 2010. The negative variance can be attributed to lower pipeline volumes on Sunoco Logistics’ refined product pipelines in the southwest and unplanned refinery outages in the northeast.
Terminal Facilities: The partnership’s ‘Terminal Facilities’ business segment had an operating income of $29.0 million in the quarter, up 31.2% year over year, mainly resulting from the butane blending business acquired in July 2010, higher volumes as well as fees at the refined products terminals, and higher operating gains at the Nederland crude oil terminal. These factors were partially negated by lower throughput at the partnership’s refinery terminals on account of unplanned refinery outages.
Crude Oil Pipeline System: Operating income in the Crude Oil Pipeline System segment was up 46.4% from the year-earlier level to $41.0 million, driven by higher lease acquisition results and increased earnings related to Sunoco Logistics’ acquisition of additional joint venture interests.
Capital Expenditure & Balance Sheet
The partnership’s maintenance capital expenditure and expansion capital expenditure (including acquisition) for the quarter totaled $3.0 million and $25.0 million, respectively. As of March 31, 2011, Sunoco had $1,280.0 million in total debt (consisting of $82.0 million of borrowing under the partnership’s credit facility), representing a debt-to-capitalization ratio of approximately 55.2%.
Our Recommendation
Sunoco Logistics – which competes in the ‘Oil and Gas Production Pipeline’ industry with firms like TC PipeLines L.P. (TCLP) and Energy Transfer Equity L.P. (ETE) – has a Zacks #3 Rank (Hold rating) in the short run. We are maintaining our ‘Neutral’ recommendation on the units in the longer term.
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