Sunoco Logistics Partners L.P. (SXL) reported strong first-quarter 2008 results, primarily due to high oil prices and good performance from its Western Pipeline segment. Sunoco reported better-than-expected first-quarter 2008 earnings of $43.2 million or $1.07 per limited partner diluted unit (our estimate was for $0.84 per unit), compared to $22.3 million or $0.70 per limited partner diluted unit in the prior-year period and $35.8 million or $0.94 per limited partner diluted unit in the previous quarter. We have adjusted the reported earnings of $0.97 per limited partner diluted unit for impairment charges of $0.1 per unit.
Importantly, the partnership announced an 8.5% year-over-year increase in quarterly distribution to the annualized run rate of $3.58 per unit, reflecting its positive distribution-growth profile. We are, however, maintaining our Hold recommendation on SXL units given their premium valuation relative to peers and their relatively modest long-term distribution-growth prospects. Our preferred names in this space remain Enterprise (EPD), NuStar (NS), and TC PipeLines (TCLP). The relatively unfavorable macro backdrop characterized by restricted access to capital continues to weigh on the entire market in general and MLPs in particular.
As a result, yield spreads have widened significantly for the entire group. On a distribution yield basis, SXL common units are currently trading at a premium to its peer pipeline MLP group average. This represents a 296 basis-point (bps) spread over the 10-year Treasury bond, compared to the peer group's average spread of 318 bps. Our new $50 target price (up from $49) reflects an annualized distribution run rate of $3.83 per unit, 7% above current levels, and a target yield of 7.70%. Our yield assumption is based on a 320 bps spread over our 10-year Treasury bond yield expectation of 4.50%.
Read the full analyst report on SXL.
Read the full analyst report on EPD.
Read the full analyst report on NS.
Read the full analyst report on TCLP.
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