Sunoco Logistics Partners, LP (SXL). is a crude oil and refined products Master Limited Partnership, whose majority stakeholder and general partner is Sunoco, Inc. (SUN). Sunoco Logistics was spun off from Sunoco Inc. in an IPO in 2002. Sunoco Logistics is different from many of its peers because its units have significant capital appreciation potential. Most MLP’s have high dividend yields, but very little stock price growth potential. SLX’s capital gains potential stems from its enviable geographic location in the heart of fast-expanding U.S. natural gas shale beds, its strong financial backing from general partner, Sunoco Inc., and its leverage to oil and gas prices, which provide outsized income and cash flow when prices move upward. Lastly, the stock will soon become more affordable to the retail investor when a 3-for-1 stock split is effected on December 2nd.
What is a Master Limited Partnership, and how does the SXL/SUN relationship work?
A MLP is a type of limited Partnership that is publicly traded. There are two types of partners. The Limited partner (in this case, Sunoco Logistics) provides capital to the MLP and in return receives income distributions from the MLP’s cash flow stream. The general partner (in this case, Sunoco, Inc.) is responsible for managing the MLP’s business affairs, and receives compensation linked to the performance of the venture. In order for a partnership such as this to be legally classified as an MLP, it has to derive about 90% of its cash flow from real estate, natural resources, and/or commodities. The popularity of MLPs has exploded over the last few years because they combine the tax benefits of a limited partnership (only the distributions are taxed), with the liquidity of a publicly traded security. The vast majority of MLPs are pipeline businesses (like SXL), since they earn very stable income from the transport of energy (a commodity that is always needed). Stable income is necessary for the regular quarterly payment of a high dividend. The higher the quarterly distribution (thanks to strong cash flow), the greater the fee paid to the general partner. As such, in this case, Sunoco Inc. (the general partner) has a big incentive to generate as much cash flow from its limited partner (SXL) as possible.
How will it generate this cash flow?
The partnership has four segments: Crude oil pipeline, Crude oil acquisition & marketing, Refined products pipeline system, and Terminal facilities. The first two divisions are the partnership’s key income drivers. Strong cash flow ought to be generated in 2012 from full-year contributions from the Texon Crude Oil Marketing, Eagle Point Tank Farm, East Boston Terminal, and Inland Refined Product Pipeline acquisitions. In addition, greater income will likely arise from growing domestic oil and refined product production, and arbitrage income from the persistence of the WTI/Brent crude spread.
Long-term earnings growth
Most of the above-average capital gains we envision ought to be generated by the company’s pipelines (many of which are being built today), which will transport oil and gas from the Oklahoma and West Texas shale beds to refineries along the Gulf Coast, where it is shipped abroad. Higher revenue should also be generated from fees from fuel flowing through SXL’s pipelines from domestic shale beds to heavily populated eastern U.S. cities. In 2013, Sunoco Logistics’ West Texas-Longview line is due to add another 100,000 barrels a day, on top of the 250,000 barrels already traveling through it. We also look for the Crude Oil Acquisition & Marketing segment to make money from Brent/WTI spreads, which are liable to remain above $12 a barrel through 2013. Furthermore, a better economy would increase demand for crude oil and natural gas in infrastructure-constrained areas, where SXL has a substantial presence. This should give SXL pricing power, which would aid its refining margins.
Summing up, burgeoning onshore crude oil and natural gas flow, thanks to growing demand in the U.S. and abroad, should benefit SXL’s top and bottom lines, and consequently, stock price appreciation and dividend disbursement. It is a top-ranked equity that has an Above Average Safety rank (2), a low Beta (.85), and an average annual dividend yield that has surpassed 6% in each of the last five years. Indeed, the company recently announced that it will increase its annual dividend by 7%, to $4.93 a share. Lastly, the stock will become more affordable on December 2nd, when a 3-for-1 split is due to be completed. Note, however, that investors should talk to their tax accountants about their personal tax situations, when investing in MLPs.
At the time of writing, neither the author or any of his family members had a position in any of the companies mentioned.