One of 2011's biggest winners was Sunoco Logistics Partners LP (NYSE:SXL), which returned almost 50 percent for the year -- a strong performance in a somewhat dismal year for stocks. The units also returned 33 percent in 2010 and generated an almost 60 percent gain for investors in 2009.
The stock's popularity in turbulent times is easy to understand. Sunoco Logistics Partners LP is a conservatively run Master Limited Partnership that operates 5,400 miles of crude oil pipelines, 2,500 miles of refined product pipelines and owns 42 refined products terminals with some 24 million barrels of oil storage capacity.
Roughly 85 to 90 percent of the partnership's quarterly cash flow is locked in under long-term, fixed-rate contracts with major energy producers, so dramatic swings in oil and gas prices won't threaten the MLP's distribution. In fact, the company has boosted its payout in 25 consecutive quarters.
The company's crude-oil pipeline network connects oilfields in West Texas and the key oil hub at Cushing, Okla., to the Gulf Coast and Sunoco Logistics' massive crude oil terminal in Nederland, Texas.
Sunoco Logistics' West Texas Gulf Expansion will add capacity to transport another 100,000 barrels of oil per day from West Texas to the Nederland terminal, accommodating rising oil output from the Permian Basin. Demand for additional pipeline capacity was so strong that the MLP was able to lock in cash flow under long-term contracts before the firm even broke ground on the project.
Sunoco Logistics has also enlarged the Nederland terminal, adding two additional tanks in the first quarter of 2011 and another two by early 2012. These projects will increase Nederland's storage capacity to 22 million barrels of oil. As with the company's pipelines, customers pay Sunoco Logistics a fee to guarantee access to the facility regardless of whether they use their contracted capacity.
In addition to storage fees, Sunoco Logistics earns income from ancillary services such as fuel blending--for example, blending ethanol with gasoline to meet regional requirements. The MLP is also expanding its butane blending business rapidly in response to rising production of this natural gas liquid (NGL).
Butane is cheap relative to oil and gasoline, incentivizing refiners to blend cheaper butane with more expensive gasoline. This business also features long-term contracts that guarantee minimum cash flows. Management plans to roll out this proprietary butane blending technology at all of the company's terminal facilities over time.
The company is also expanding its exposure to NGLs via another project. The Marcellus Shale in Appalachia contains large quantities of natural gas and significant volumes of ethane, an NGL that's used to make ethylene and other key petrochemicals. But the region lacks sufficient capacity to transport ethane from the region to petrochemical processing facilities.
Sunoco Logistics is working on an ethane pipeline that would collect volumes from the Marcellus and transport them to a major petrochemicals complex in Sarnia, Ontario. Management expects the first phase of this project to come online in 2012. The project would utilize an existing refined-product pipeline that's already in place, reducing costs.
With this combination of reliable income and attractive growth prospects, it's little wonder that investors loaded up on units of Sunoco Logistics Partners in 2011.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.