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Momentum

Tesoro Logistics L.P. (TLLP - Snapshot Report) units have jumped almost 30% in the past 2 months. This fuel-gatherer/transporter hit a new 52-week high on August 7 and became a Zacks #1 Rank (Strong Buy) stock on the same day, following impressive second quarter results.

Sporting a rich distribution yield and excellent earnings growth projections, Tesoro Logistics has potential for further upside. On top of this, the partnership’s synergistic relationship with parent Tesoro Corp. (TSO) stands it in good stead.

Coming off a Winning Quarter

Tesoro Logistics – which went public on April 26, 2011 – reported second quarter earnings per unit of 41 cents on August 6, beating the Zacks Consensus Estimate of 39 cents by 5%. Revenues of $33.2 million also surpassed the Zacks Consensus Estimate of $29.0 million. Results were driven by a 40% improvement in crude oil trucking volumes.

Drop-Down Acquisitions to Boost Cash Distribution

Tesoro Logistics is set to benefit from its ties with asset-rich sponsor Tesoro Corp., which retains a 56% stake in the partnership. A sound fee-based relationship with Tesoro – the nation's second-largest independent refiner – shields the pipeline operator from competitive pressures in the midstream energy space, providing it with stable cash flows and consistent top-line growth opportunities.

Additionally, the partnership continues to leverage its relationship with Tesoro to make ‘drop-down’ transactions (or asset buys from the partnership's sponsor company). As part of this arrangement, Tesoro Logistics recently bought the Martinez crude oil marine terminal from Tesoro for $75 million and is expected to purchase more properties – including the Long Beach marine terminal and the Los Angeles short-haul pipelines – during the second half of 2012.

The ‘drop-downs’ are expected to be immediately accretive to Tesoro Logistics’ distributable cash flow, thereby boosting cash distributions. As it is, the partnership already dishes out a quarterly payout of 41 cents per unit ($1.64 per unit annualized), yielding an impressive 4.2%.

Earnings Set to Move Up

Following the second quarter earnings beat, the Zacks Consensus Estimate has moved up by 5 cents (or 3%) to $1.79. For 2013, the Zacks Consensus Estimate advanced 7 cents (or 3%) to $2.37.

Given the $1.11 per unit earned in 2011, the projected growth rate stands at 62% for 2012 and 32% for 2013.

Valuation Picture

Units of Tesoro Logistics are going for about 22.3 times forward estimates, which seems a bit pricey but should not disappoint investors given the strong earnings projections. Moreover, the PEG ratio of 1.1, though seemingly overvalued, is less than the 2.2 similar firms offer. Additionally, Tesoro Logistics has a trailing 12-month return on equity (ROE) of 43.3%, almost four times the peer group average of 11.1%. This implies that the partnership reinvests its earnings much more efficiently than its peer group.

Market Performance & Technicals

The chart below shows a secular positive price movement since early-June. In the process, units of Tesoro Logistics have also outperformed the 50 and 200-day moving averages. Currently trading close to its 52-week high, the ever-increasing gap between the unit price and that of the moving average lines indicates more bullishness. With drop-down acquisitions supporting further distribution growth, the stock looks poised to add to its gains.

Tesoro Logistics is well positioned on the growth curve with a very strong year over year profit increase forecasted, as well as a healthy yield and expected earnings-accretive contribution from potential drop-down opportunities.

San Antonio, Texas-based Tesoro Logistics L.P. is a publicly traded master limited partnership that is engaged in the ownership, operation, development and acquisition of crude oil and refined products logistics assets.

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