Sunoco Logistics Fairly Priced

Philadelphia-based Sunoco Logistics Partners L.P. (SXL - Analyst Report) is a master limited partnership (MLP) that acquires, owns, and operates a geographically diverse portfolio of refined product and crude oil pipelines and terminal facilities.
 
Sunoco Logistics reported solid second-quarter results, reflecting higher lease acquisition results, increased fees, and contributions from the recent MagTex acquisition. Importantly, the partnership increased its quarterly cash distribution by 11.2% year over year to the annualized rate of $4.16 per unit. 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.
 
We also believe that the partnership’s synergistic relationship with its general partner, Sunoco Inc. (SUN - Analyst Report) adds to its positive attributes by providing Sunoco Logistics with stable cash flows and consistent top-line growth opportunities.
 
At the same time, we remain concerned with Sunoco Logistics’ high throughput dependence upon its general partner, as any adverse development on that front (like the recent idling of the Eagle Point refinery) will severely impact the partnership’s financial performance.
 
We also remain worried on valuation grounds. On a distribution yield basis, Sunoco Logistics common units are currently trading at a premium to its peer pipeline MLP group average. This represents a 358 basis-point (bps) spread over the 10-year Treasury bond, compared to the peer group’s average spread of 455 bps. As such, we see limited room for upside from current levels and therefore rate Sunoco Logistics units as Neutral.
 
Our $61 price objective reflects an annualized distribution run rate of $4.37 per unit, 5% above current levels, and a target yield of 7.2%. Our yield assumption is based on a 345 bps spread over our 10-year Treasury bond yield expectation of 3.75%.