On Mar 14, 2013, we downgraded Philadelphia-based crude oil
pipelines and terminals operator
Sunoco Logistics Partners L.P.
) to Neutral from Outperform purely on valuation grounds, as we
see limited near term price upside. Our new investment thesis is
supported by a Zacks Rank #3 (Hold).
Why the Downgrade?
Tepid demand for refined products and the difficult operating
environment are key areas of concern, in our view. We also remain
worried on account of cost overruns on expansion projects, which
lead to lower returns.
Recent results have been driven by strength in its crude pipeline
system and terminals facilities. Importantly, the partnership has
grown its cash distribution for 31 consecutive quarters. 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.
However, the actual amount of cash distributed to Sunoco
Logistics unitholders may fluctuate and are directly exposed to
the partnership's future operating performance, which is
susceptible to movements in margins and throughput volumes.
Realized margins and/or volumes could differ significantly from
our estimates, thereby affecting Sunoco Logistics' cash
Moreover, weak refined products demand and refinery downtime -
which adversely affects pipeline and terminal throughput - may
present a risk to the cash flow estimates and lower Sunoco
Logistics' distribution growth rate.
Stocks that Warrant a Look
While we expect Sunoco Logistics to perform in line with its
peers and industry levels in the coming months and advice
investors to wait for a better entry point before accumulating
shares, one can look at
Calumet Specialty Products Partners L.P.
Lehigh Gas Partners L.P.
Marathon Petroleum Corp.
) as good buying opportunities. These oil refiners and marketers
- sporting a Zacks Rank #1 (Strong Buy) - have solid secular
growth stories with potential to rise significantly from current
CALUMET SPECLTY (CLMT): Free Stock Analysis
LEHIGH GAS PTNR (LGP): Free Stock Analysis
MARATHON PETROL (MPC): Free Stock Analysis
SUNOCO LOGISTIC (SXL): Free Stock Analysis
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