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Rochester Institute of Technology Saunders College of Business November 11, 2011 Troy Lubberts Eric Furnal Prerna Malhotra Russell Sisipenzi Sunoco Logistics.

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Presentation on theme: "Rochester Institute of Technology Saunders College of Business November 11, 2011 Troy Lubberts Eric Furnal Prerna Malhotra Russell Sisipenzi Sunoco Logistics."— Presentation transcript:

1 Rochester Institute of Technology Saunders College of Business November 11, 2011 Troy Lubberts Eric Furnal Prerna Malhotra Russell Sisipenzi Sunoco Logistics Partners, LP (SXL)

2 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. R  I  T FMA 2

3 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 R  I  T FMA 3

4 Summary & Investment Conclusions Summary & Investment Conclusions R  I  T FMA 4

5 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 R  I  T FMA 5

6 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 R  I  T FMA 6

7 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 26 th 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 R  I  T FMA 7

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10 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) R  I  T FMA 10

11 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 R  I  T FMA 11

12 Business Summary R  I  T FMA 12

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14 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. R  I  T FMA 14

15 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 R  I  T FMA 15

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17 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 R  I  T FMA 17

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19 R  I  T FMA 19 Growth EstimatesSXLIndustrySectorS&P 500 Current Qtr25.30%46.00%-48.40%27.50% Next Qtr72.20%22.00%1.30%19.60% This Year38.40%52.70%27.20%12.20% Next Year-2.90%14.40%-16.40%13.20% Past 5 Years19.18%N/A Next 5 Years7.03%16.35%15.86%10.91% P/E PEG Ratio

20 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 R  I  T FMA 20

21 Historical Performance R  I  T FMA 21

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28 Main source of cash:Operating Activities Main use of cash: Investing Activities Operating Activities – Capital Expenditures = positive for most years R  I  T FMA 28 Figures (in millions of $) Cash at Beginning of the Year Operating Activities Investing Activities Financing Activities Cash at End of the Year Capital Expenditures

29 Liquidity – ability to meet short-term obligations – Current Ratio: – Quick Ratio:0.899 – Cash Ratio:0.001 Solvency – ability to meet long-term obligations – Debt-to-Assets:0.678 – Debt-to-Equity:2.730 R  I  T FMA 29

30 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 R  I  T FMA 30

31 Recapitulation of inputs – Cost of Equity – Cost of Debt – WACC – Distribution growth rates – FCFF – Firm Growth Rates Year 1 Years 2-5 Perpetual (6+) R  I  T FMA 31

32 R  I  T FMA Intrinsic Value – Dividend (Distribution) Discount Model One-period DDM – $53.49 per common unit Two-stage DDM – $ per common unit – Discounted Free Cash Flow Model FCFF/FCFE – $ per common unit 32

33 Technical Analysis R  I  T FMA 33

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38 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 R  I  T FMA 38


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