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On Mar 14, 2013, we downgraded Philadelphia-based crude oil pipelines and terminals operator Sunoco Logistics Partners L.P. (SXL - Analyst Report) 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.

Detailed Analysis

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 distributions.

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. (CLMT - Snapshot Report), Lehigh Gas Partners L.P. (LGP - Snapshot Report) and Marathon Petroleum Corp. (MPC - Analyst Report) 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 levels.

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