On Jan 22, 2014, we downgraded Philadelphia-based crude oil pipelines and terminals operator Sunoco Logistics Partners L.P. (SXL) to Underperform from Neutral. Our revised investment thesis is supported by a Zacks Rank #5 (Strong Sell).
Why the Downgrade?
Based upon the number of near-term challenges, we see Sunoco Logistics as a risky bet that ordinary investors should exit.
Detailed Analysis
The recent narrowing of crude differentials has adversely affected Sunoco Logistics’ crude oil margins and impacted its results. With the spread expected to remain low during the foreseeable future, the partnership’s operating performance may suffer further.
Though we welcome the partnership’s consistent distribution hikes, it’s near to medium term outlook will be dragged down by tepid demand for refined products and the difficult operating environment. Realized margins and/or volumes could differ significantly from our estimates in this case, thereby affecting Sunoco Logistics’ cash distributions.
As usual, we remain worried about potential difficulties in completing accretive transactions and unfavorable regulatory changes by the Federal Energy Regulatory Commission (FERC) in the future.
Finally, partnerships typically depend on equity and debt markets for growth finance. Market turmoil resulting from issues such as the recent subprime crisis, which hinders access to debt/equity markets, will impact MLP growth prospects.
Stocks That Warrant a Look
While we expect Sunoco Logistics to perform below its peers and industry levels in the coming months and see little reason for investors to own the stock, one can look at Swift Energy Co. (SFY), Linn Co. LLC (LNCO) and Warren Resources Inc. (WRES). These U.S. upstream energy operators – sporting a Zacks Rank #1 (Strong Buy) – have recorded solid growth and have the potential to rise significantly from the current levels.
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