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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 Partners, LP (SXL)
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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
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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
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Summary & Investment Conclusions Summary & Investment Conclusions R I T FMA 4
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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
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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
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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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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
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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
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Business Summary R I T FMA 12
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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
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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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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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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/E13.0810.518.2515.99 PEG Ratio1.862.120.551.29
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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
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Historical Performance R I T FMA 21
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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 $)12-200612-200712-200812-200912-2010 Cash at Beginning of the Year21.659.412.00 Operating Activities141.48207.50228.59176.18341.00 Investing Activities-241.22-119.35-331.24-225.83-426.00 Financing Activities87.51-95.56102.6649.6585.00 Cash at End of the Year9.412.00 Capital Expenditures-119.80-105.90-145.80-175.60-174.00
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Liquidity – ability to meet short-term obligations – Current Ratio: 1.051 – 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
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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
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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
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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
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Technical Analysis R I T FMA 33
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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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