Rochester Institute of Technology
Saunders College of Business
Sunoco Logistics Partners, LP (SXL)
November 11, 2011
Troy Lubberts
Eric Furnal
Prerna Malhotra
Russell Sisipenzi
RIT FMA
Many of the phrases, tables and graphs used in this presentation have
been derived from some or all of the following sources: 10-K, 10-Q,
Thomson, Hoovers, Mergent Online, Yahoo Finance, and S&P online
research documents.
This presentation is intended to synthesize these sources so that they can
be used to analyze Sunoco Logistics Partners L.P. Common Units.
2
RIT FMA
Summary & Investment Conclusions
– Capsule description of the company with recent developments
– Major conclusions, valuation summary and investment action
Business Summary
– Industry and competitive analysis
Risks
– Possible negative industry, regulatory and company developments
– Risks in forecasts
Historical Performance
Valuation
– Description of models used, inputs and statement of conclusions
3
RIT FMA
Summary
&
Investment Conclusions
4
RIT FMA
•
•
•
•
•
•
Headquartered in Philadelphia, PA
1,400 employees
Operates in 22 states within the Northeast, Midwest and Gulf Coast
Traded on the NYSE as SXL
Market capitalization = $3.22B (at the close of trading on 10/27/11)
Master Limited Partnership – MLP
– Combines tax benefits of Limited Partnership with liquidity of a publicly traded security
– Corporate profits not taxed and investors allowed a prorated depreciation write-off
• Created by Sunoco, Inc (SUN) when it transferred most of its pipeline,
terminal and storage assets to the partnership
5
RIT FMA
• Publicly-traded partnerships (shares  units / dividends  distributions)
• Mandate: to pay out all earnings not needed for current operations and
maintenance of capital assets (exception = acquisition opportunities)
• MLPs are pass-though entities  do not pay tax at partnership level
• Distributions are not considered dividends, rather a return of capital
• Investors pay taxes on their proportionate share of MLP’s income, offset by:
– Depreciation and depletion
• MLPs tend to trade at higher multiples than similar assets in a corporate
structure:
– Pass-through tax advantages
– Premium investors tend to place on yield
– Lower cost of capital which facilitates a potentially faster growth rate
6
RIT FMA
• Recent Developments
– Sunoco, Inc. struggles
• Moody’s downgrades long-term credit rating to junk status
• Announced plans to exit the refining business
– Acquisition, Acquisition, Acquisition
• 2011 acquisitions total $500M
– Texon Crude with exposure to shales
– Eagle Point Tank Farm
– East Boston Products Terminal
– Strong outlook for future developments
• 26th consecutive distribution increase with 7% growth forecast
• Currently running an 75/25 mix of ratable to market related revenue
• Very bullish on terminals and blending services, crude A&M and crude pipelines
7
RIT FMA
$1.40
$1.20
$1.00
$0.80
$0.60
$0.40
$0.20
$2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
8
RIT FMA
9
RIT FMA
• Earnings projections
– 2012 EPS estimates:
• Range = 6.05 – 9.30
• Average = 7.38
• Previous year’s 2012 estimate = 7.60
– Factors influencing EPS estimates:
• Ability to integrate new acquisitions into existing asset base (synergies?)
• Development of new customer base
• Market conditions (oil futures remaining in contango, WTI vs. Brent Spreads)
– Oil futures remaining in contango
– WTI vs. Brent Spreads
– End user demand of energy (blended products)
10
RIT FMA
• SXL appears to be an attractive investment for income conscious investors
– Opportunity for capital appreciation at or below industry growth rates
– More attractive for taxable investment accounts
• Discounted Cash Flow (DCF) models indicate SXL is severely undervalued
– Market appears to be discounting SXL’s growth because of recent developments at
Sunoco, Inc.
– Sunoco Logistics will rely more heavily on acquisitions for growth in coming years
• Investment Recommendation = Short Term – HOLD / Long Term – BUY
– Industry landscape appears extremely attractive
– Risks associated with Sunoco, Inc. and SXL’s ability to integrate recent acquisitions to
provide stable growth remains in question
11
RIT FMA
Business Summary
12
RIT FMA
13
RIT FMA
• Lynn Elsenhans
• Received the 2011 Paradigm Award
• Director, Greater Philadelphia Chamber of Commerce
• (2007-Present) Director, Member of Audit & Finance Committee and
Member of Public Policy & Environment Committee International Paper Co.
14
RIT FMA
• Business Units
– Refined Products Pipeline System
• Transports products from refineries
• Consists of 6 major pipelines
– Terminal Facilities
• Provides terminalling, blending and other ancillary services
– Crude Oil Pipeline System
• Gathers and transports crude oil (mainly in Oklahoma and Texas)
– Crude Oil Acquisition & Marketing (new reporting segment)
• Purchases and sells crude oil
• Has become a larger share of the revenue mix as crude oil futures markets have remained in
contango
15
RIT FMA
Revenue
Terminal Facilities
Crude Oil Pipelines
Operating Profit
Acquisition & Marketing
Refined Products
16
RIT FMA
• Industry Analysis
– Porter’s 5 Forces
• Threat of Entry (Low)
• Power of Suppliers (Moderate)
• Power of Buyers (High)
• Threat of Substitutes (Low)
• Rivalry among Existing Competitors (Relatively High)
– Implications
• The Oil & Gas Pipeline Industry remains attractive for incumbents
– Organic growth opportunities (crude oil acquisition and marketing)
– Acquisition opportunities (terminal facilities, refined products & crude oil pipelines)
• Operating margins remain tight because of strong industry competition
17
RIT FMA
18
RIT FMA
Growth Estimates
SXL
Industry
Sector
S&P 500
Current Qtr
25.30%
46.00%
-48.40%
27.50%
Next Qtr
72.20%
22.00%
1.30%
19.60%
This Year
38.40%
52.70%
27.20%
12.20%
Next Year
-2.90%
14.40%
-16.40%
13.20%
Past 5 Years
19.18%
N/A
N/A
N/A
Next 5 Years
7.03%
16.35%
15.86%
10.91%
P/E
13.08
10.51
8.25
15.99
1.86
2.12
0.55
1.29
PEG Ratio
19
RIT FMA
• Operational
– Ability to integrate new acquisitions
– Loss of Sunoco Inc. as a customer (or
significant reduction in current level of
throughput)
• Regulatory
– Increasing environmental regulation
surrounding extracting, fracking, and
emissions
– Rates subject to regulatory approval
– Increasing safety regulations
• Market Related
- Changes in demand for, or supply of,
crude oil and petroleum products
- Improvements in energy efficiency
resulting in reduced demand for
petroleum products
- Geopolitical events that disrupt the
market equilibrium for energy
- Rising interest rates
- Makes low-risk assets more
attractive
- Increases cost of capital in a capital
intensive industry
20
RIT FMA
Historical Performance
21
RIT FMA
Earnings Per Share (EPS)
10
8
6
4
2
0
2006
2007
2008
2009
2010
22
RIT FMA
Return on Equity (ROE)
40
35
30
BPL
25
EPD
20
SXL
PAA
15
10
2006
2007
2008
2009
2010
23
RIT FMA
Net Income
$1,200
Millions
$1,000
$800
SXL
$600
BPL
$400
EPD
PAA
$200
$0
2006
2007
2008
2009
2010
24
RIT FMA
Net Profit Margin
30
25
20
BPL
15
EPD
10
SXL
PAA
5
0
2006
2007
2008
2009
2010
25
RIT FMA
Net Income vs. Operating Cash Flow
400
Millions ($)
350
300
250
Net Income
200
150
Operating CF
100
50
2006
2007
2008
2009
2010
26
RIT FMA
Efficiency Ratios
80
12
70
10
60
8
Days
50
6
40
Days Sales
Outstanding
4
30
20
2
10
0
0
-2
2006
2007
2008
2009
2010
Cash Conversion
Cycle
TTM
27
RIT FMA
Figures (in millions of $)
12-2006 12-2007 12-2008 12-2009 12-2010
Cash at Beginning of the Year
21.65
9.41
2.00
2.00
2.00
Operating Activities
141.48
207.50
228.59
176.18
341.00
Investing Activities
-241.22
-119.35
-331.24
-225.83
-426.00
Financing Activities
87.51
-95.56
102.66
49.65
85.00
9.41
2.00
2.00
2.00
2.00
-119.80
-105.90
-145.80
-175.60
-174.00
Cash at End of the Year
Capital Expenditures
Main source of cash:
Main use of cash:
Operating Activities
Investing Activities
Operating Activities – Capital Expenditures = positive for most years
28
RIT FMA
• Liquidity – ability to meet short-term obligations
– Current Ratio:
– Quick Ratio:
– Cash Ratio:
1.051
0.899
0.001
• Solvency – ability to meet long-term obligations
– Debt-to-Assets: 0.678
– Debt-to-Equity: 2.730
29
RIT FMA
• Description of models used
– Dividend (Distribution) Discount Model (DDM)
• One-period DDM
– Severely undervalues company due to gloomy 1-year forecasted growth rate
• Two-stage DDM
– Produces inflated intrinsic value by assuming minimal impact from Sunoco Inc.
– Discounted Free Cash Flow Model
• Free cash flow to the firm (FCFF) and free cash flow to equity (FCFE)
– Produces most realistic valuation based on all available information
– Does not factor “normalized” cash flows for years 2 – 6
30
RIT FMA
• Recapitulation of inputs
–
–
–
–
–
–
Cost of Equity
Cost of Debt
WACC
Distribution growth rates
FCFF
Firm Growth Rates
• Year 1
• Years 2-5
• Perpetual (6+)
31
RIT FMA
• Intrinsic Value
– Dividend (Distribution) Discount Model
• One-period DDM
– $53.49 per common unit
• Two-stage DDM
– $158.05 per common unit
– Discounted Free Cash Flow Model
• FCFF/FCFE
– $108.28 per common unit
32
RIT FMA
Technical Analysis
33
RIT FMA
34
RIT FMA
35
RIT FMA
36
RIT FMA
37
RIT FMA
• Conclusions
– Positive Attributes
• Industry landscape appears extremely attractive
• Strong growth via acquisition
• Steady growth rate of distributions
• Strong technicals
– Negative Attributes
• Risks associated with deterioration of Sunoco’s refining business
• Concerns regarding company’s ability to integrate acquisitions into existing business
• Concerns regarding forward/backward integration of marketplace
• Investment Recommendation = Short Term – HOLD / Long Term – BUY
38