Sunoco Logistics Partners is a company formed in 2002 with the mission of acquiring, transporting, storing and selling crude and refined oil. SXL aims to generate growing cash flows, increase its distributions and provide an attractive return to investors. Sunoco Logistics' services are organized into three business units: Refined Products Pipelines, Crude Pipelines, and Terminals.
Organizational structure
The Refined Products Pipelines entity provides transportation services for gasoline, fuel oil, diesel and kerosene. Crude oil transported in pipelines includes domestic production, as well as Canadian production and other foreign imports. THE terminals consist of 42 active terminals of refined products, the terminal of Netherlands, several other crude oil terminals serving refineries in the Philadelphia area, and a gas terminal near Detroit, Michigan.
Sunoco, Inc and Sunoco Logistics
Sunoco Logistics should not be confused with Sunoco, Inc (NYYE:SUN), a refiner and marketer of petroleum and petrochemical products, with which it has a unique strategic relationship and which owns 33.1% of in its sister company. Sunoco Inc is one of the largest independent refiners in the United States in terms of capacity. The company is capable of producing 910,000 barrels of refined crude product per day at its refineries located throughout the United States and produces gasoline, jet fuel, heating oil and diesel. Sunoco Inc was formerly known as Sun Company Inc (1886-1920 and 1976-1998) and Sun Oil Co. (1920-1976). Sunoco is one of the largest gasoline distribution companies in the United States, with Sunoco brand gasoline sold in over 4,700 retail locations. With Sunoco's revenue coming from multiple sources, the company's earnings are not as exposed to oil price volatility. Strict cost management is one of the company's strategic directions. In addition to closing refineries and selling businesses, the company cut its dividend in half (which is not the case for SXL).
Sunoco Logistics plans to grow organically by increasing the volume of crude oil and refined products transported, building new or expanding existing pipelines, and developing and adding additional storage at exit terminals. The company also plans to pursue accretive acquisitions that are synergistic with its existing asset base or that result from geographic or industry diversification. In addition, Sunoco, Inc. has agreed not to compete with Sunoco Logistics in the areas of pipelines, terminals, and storage as long as it controls the partnership.
Master Limited Partnership (MLP)
Sunoco Logistics is a publicly traded partnership or Master Limited Partnership (MLP). In this framework, profits are allocated directly to the partners (the equivalent of shareholders), which avoids the company having to pay income tax on its income. This allows for a potentially higher cash payment to the partners. On the other hand, the latter are of course taxable. From a legal standpoint, for a partnership to be considered an MLP, the company must derive more than 90% of its cash flows from real estate, natural resources and raw materials.
Dividends & prices
SXL's trailing twelve-month price-to-earnings ratio is just 8.00 and THE performance comes to a generous 6.30% (MLPs traditionally offer large distributions due to their status). The significant increase in earnings per share in recent years is of course not unrelated to this attractive valuation. The average long-term yield is even higher, at 7,61%, with an annual increase of 10,35%. The history of successive distribution increases is not huge (8 years), which is normal given the youth of the company.
There volatility is important, with 23.16%, but poorly correlated with the market, with a beta of only 0.16. Sunoco has performed well in recent years relative to the market. The stock suffered in 2008, but recovered very well and very quickly thereafter.
Conclusion
Sunoco Logistics is an interesting stock, with an attractive valuation from both a dividend and earnings perspective. The company benefits from a situation rent (monopolistic position) due to its access to resources, which is typical for MLPs. The only downside: fairly high volatility and the company's youth and dividends, even though the parent company (SUN) has an impressive track record (remember that the latter has cut its distributions in half). For these reasons, we consider that the stock should be kept if it is already in the portfolio, but, always preferring to err on the side of caution, we do not recommend buying this stock for the moment.
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