Sunoco Logistics Partners L.P. (SXL) – a master limited partnership (“MLP”) − announced strong third-quarter 2010 results, driven by solid performance from its ‘Crude Oil Pipeline System’ segment on the back of robust crude leasehold business.
The partnership’s diluted earnings per unit (“EPU”), excluding non-cash gains from pipeline interest acquisitions, came in at $1.64, way above the Zacks Consensus Estimate of $1.43 and the year-ago profit of $1.13. Revenues of $1,883.4 million were up 31.8% from the year-earlier level but failed to meet our expectation of $1,925.0 million.
Importantly, the partnership raised its quarterly distribution by 2.6% sequentially and 9.9% year-over-year to $1.17 per unit or $4.68 per unit annualized, representing the twenty-ninth expansion in the past 30 quarters. Distributable cash flow increased approximately 29.6% year over year to $70.0 million.
Refined Products Pipeline System
Operating income in the Refined Products Pipeline System segment was $13.2 million, virtually unchanged from the third quarter of 2009. Higher equity income from the partnership’s joint venture interests and increased pipeline operating gains were offset by lower pipeline volumes (due to the permanent shut-down of the Eagle Point refinery in the fourth quarter 2009).
Terminal Facilities
Sunoco’s Terminal Facilities business segment had an operating income of $23.6 million in the quarter, up 13.9% year over year, mainly resulting from higher fees and additional tankage at the Nederland crude oil terminal, somewhat offset by reduced refinery terminal volumes (stemming from the permanent shut-down of the Eagle Point refinery) and rise in operating expenses.
Crude Oil Pipeline System
Operating income in the Crude Oil Pipeline System segment more than doubled from the year-earlier level to $52.2 million, driven by higher lease acquisition results, higher pipeline volumes 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 $10.7 million and $269.2 million, respectively. Sunoco Logistics expects its full-year 2010 maintenance capital expenditure to be approximately $40 million, while expansion capital for the year is anticipated to be $145 – $160 million (excluding acquisitions).
As of September 30, 2010, Sunoco had $1,347.8 million in total long term debt (consisting of $149.8 million of borrowing under the partnership’s credit facility), representing a debt-to-capitalization ratio of approximately 56.6%.
Our Recommendation
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. But the retardation in refined products demand growth and the difficult operating environment remain key areas of concern, in our view.
As such, we are currently Neutral on Sunoco Logistics units with a Zacks #3 Rank (Hold).
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