Sunoco L.P. Positives Reflected

We are maintaining our Hold recommendation on Sunoco Logistics Partners, L.P. (SXL - Analyst Report) units following its strong second-quarter results, which benefited from solid contribution from its Western Pipeline System.

Importantly, the partnership increased its quarterly distribution by 11.7% year-over-year to the annualized rate of $3.74 per unit. While the partnership no doubt offers strong distribution-growth prospects, we believe that to be already reflected in its premium valuation relative to the peer group, thereby offering limited upside from current levels. Our preferred names in this space remain Enterprise Products Partners L.P. (EPD - Analyst Report), NuStar Energy L.P. (NS - Snapshot Report) and TC Pipelines, L.P. (TCLP - Analyst Report).

The partnership’s earnings have grown to $195 million over the last twelve months. In recent transactions, Sunoco Logistics acquired a 50% interest in a refined products terminal from Mobil Pipe Line Company for approximately $13.4 million. In April, Sunoco bought a refined products pipeline system in Texas and other related assets from ExxonMobil (XOM - Analyst Report) for roughly $200 million. The deal will enable geographic and customer base expansion of the partnership’s core Northeast and Midwest refined products pipeline and terminals platform.

However, the relatively unfavorable macro backdrop characterized by restricted access to capital continues to weigh on the entire market in general and MLPs in particular. Our unchanged $45 target price reflects an annualized distribution run rate of $4 per unit, 7% above current levels, and a target yield of 8.89%. Our yield assumption is based on a 439 bps spread over our 10-year Treasury bond yield expectation of 4.50%.