rochester institute of technology saunders college of business november 11, 2011
DESCRIPTION
Rochester Institute of Technology Saunders College of Business November 11, 2011. Troy Lubberts Eric Furnal Prerna Malhotra Russell Sisipenzi. Sunoco Logistics Partners, LP (SXL). R I T FMA. Disclaimer. - PowerPoint PPT PresentationTRANSCRIPT
Rochester Institute of TechnologySaunders College of Business
November 11, 2011
Troy LubbertsEric FurnalPrerna MalhotraRussell Sisipenzi
Sunoco Logistics Partners, LP (SXL)
Disclaimer
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.
RIT FMA
2
Sunoco Logistics Partners, LP (SXL) Equity Valuation
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
RIT FMA
3
Summary &
Investment Conclusions
RIT FMA
4
Company Overview
• 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
RIT FMA
5
Master Limited Partnerships (MLPs)
• 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
RIT FMA
6
Recent Developments
• 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
RIT FMA
7
Distribution History
20022003
20032004
20052006
20062007
20082009
20092010
2011 $-
$0.20
$0.40
$0.60
$0.80
$1.00
$1.20
$1.40
14.6% Compound Annual Growth Rate
RIT FMA
8
6-Month PerformanceRIT FMA
9
Earnings Estimates
• 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)
RIT FMA
10
Summary & Investment Conclusions
• 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
RIT FMA
11
Business Summary
RIT FMA
12
Company OverviewRIT FMA
13
Chairperson, President & CEO• 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.
RIT FMA
14
Business Summary
• 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
RIT FMA
15
Business Summary Q3 2011
Revenue
Terminal Facilities Acquisition & Marketing Crude Oil PipelinesRefined Products
Operating Profit
RIT FMA
16
Industry Analysis
• 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
RIT FMA
17
Industry ComparisonRIT FMA
18
Analyst EstimatesRIT FMA
19
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
PEG Ratio 1.86 2.12 0.55 1.29
Risks
• 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
RIT FMA
20
Historical Performance
RIT FMA
21
Historical Performance
2006 2007 2008 2009 20100123456789
10
Earnings Per Share (EPS)
RIT FMA
22
Historical Performance
2006 2007 2008 2009 201010
15
20
25
30
35
40Return on Equity (ROE)
BPLEPDSXL
RIT FMA
23
Historical Performance
2006 2007 2008 2009 2010$0
$200
$400
$600
$800
$1,000
$1,200 Net Income
SXLBPLEPDPAA
Mill
ions
RIT FMA
24
Historical Performance
2006 2007 2008 2009 20100
5
10
15
20
25
30Net Profit Margin
BPLEPDSXL
RIT FMA
25
Historical Performance
2006 2007 2008 2009 201050000000
100000000
150000000
200000000
250000000
300000000
350000000
400000000Net Income vs. Operating Cash Flow
Net Income
Operating CF
RIT FMA
26
Historical Performance
2006 2007 2008 2009 2010 TTM0
1020304050607080
-2
0
2
4
6
8
10
12Efficiency Ratios
Days Sales Outstanding
Cash Conversion Cycle
Days
RIT FMA
27
Historical Performance
Main source of cash: Operating ActivitiesMain use of cash: Investing Activities
Operating Activities – Capital Expenditures = positive for most years
RIT FMA
28
Figures (in millions of $) 12-2006 12-2007 12-2008 12-2009 12-2010Cash 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
Cash at End of the Year 9.41 2.00 2.00 2.00 2.00
Capital Expenditures -119.80 -105.90 -145.80 -175.60 -174.00
Liquidity & Solvency Ratios
• 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
RIT FMA
29
Valuation
• 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
RIT FMA
30
Valuation
• Recapitulation of inputs– Cost of Equity– Cost of Debt– WACC– Distribution growth rates– FCFF– Firm Growth Rates
• Year 1• Years 2-5• Perpetual (6+)
RIT FMA
31
ValuationRIT 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
Technical Analysis
ValuationRIT FMA
33
Technical AnalysisRIT FMA
34
Technical AnalysisRIT FMA
35
Technical AnalysisRIT FMA
36
Technical AnalysisRIT FMA
37
Investment Conclusions
• 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
RIT FMA
38