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Sunoco Logistics Partners LP’s (NYSE: SXL): Lining Up Its Ducks

|Includes:SunCoke Energy (SXC)

Sunoco Logistics Partners LP’s (NYSE: SXL) second-quarter results featured several pieces of very good news. Distributable cash flow (DCF) of $106 million rose 92.7 percent from year-earlier levels to a record, covering the quarterly distribution by a robust 2-to-1 margin. That enabled management to boost the payout for the 25th consecutive quarter to $1.215 per unit, a 1.7 percent increase from the prior quarter and 6.6 percent from a year ago.

 

The oil and gas MLP was able to take advantage of robust throughput at its crude oil and gas liquids infrastructure, as well as a favorable price contango, to boost returns from its existing asset base. Certain customers’ unplanned refinery issues crimped revenue from refined products pipelines. But that was more than offset by robust income from terminal facilities and the crude oil pipeline system, which saw operating income nearly triple on expansion and acquisitions.

Equally encouraging, Sunoco Logistics continues to build its asset base, putting the pieces in place for strong future cash flow and distribution growth. Expansion capital expenditures were ramped up 121 percent to $168 million in the first half of 2011. And the company expects to deploy another $100 to $150 million in the second half.

The biggest move to date is the acquisition of a controlling interest in the Inland Corporation from privately held Texon LP for $205 million plus inventories, announced along with earnings. That deal is expected to be immediately accretive to DCF and will add lease crude business and gathering assets in 16 primarily western states. The merger will immediately boost Sunoco’s lease business by more than 30 percent and gains it entry to several high growth shale energy-rich areas, including the Bakken, Granite Wash and Eagle Ford areas. For more information regarding opportunities in shale oil investing, see Peter Staas’ InvestingDaily.com article, Emerging Shale Oil Plays.

The Inland deal will be initially financed with the MLP’s revolving credit facilities and will eventually require more permanent capital. The company’s credit position, however, is strong, leaving it some flexibility should overall conditions tighten. Credit raters S&P and Fitch still rate the company at BBB with a stable outlook, having recently affirmed their opinions. The company also continues to find opportunities for “tuck in” expansion, i.e. acquiring additional stakes in assets it’s already familiar with.



Disclosure: I am long SXL.
Stocks: SXC