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Must-know: Analysis of Sunoco Logistics' first quarter earnings

Part 3
Must-know: Analysis of Sunoco Logistics' first quarter earnings (Part 3 of 8)

Must-know: Key driver growth in crude oil business

Crude oil pipelines

Sunoco Logistics’ crude oil pipelines consist of approximately 5,400 miles of crude oil and have controlling interests in the Mid-Valley and West Texas Gulf pipelines. In 3Q13, SXL entered into an agreement to form SunVit Pipeline LLC, a joint venture with Vitol, Inc. to connect into the company’s Permian Express 2 pipeline project. It will provide additional takeaway capacity from the Permian Basin. SunVit is expected to commence operations in 2015.

Crude OilEnlarge Graph

In the Midwest United States, SXL owns approximately 1,000 miles of crude oil pipelines that originate in Texas and pass through Louisiana, Arkansas, Mississippi, Tennessee, Kentucky, Ohio, and terminate in Michigan. This pipeline provides crude oil to a number of refineries. The revenues are typically generated from tariffs that are set by the Federal Energy Regulatory Commission (or FERC).

During 1Q14, crude oil pipeline throughput increased 1.6% over 4Q13, while revenue per barrel of oil throughput decreased by 4.8%. EBITDA for 1Q14 decreased by 8.8% against 4Q13, as a result of lower pipeline operating gains and higher utility expenses.

Crude oil acquisition and marketing

Sunoco Logistics’ crude oil acquisition and marketing activities include purchasing crude oil at both the wellhead from producers, storing inventory, buying and selling crude oil of different grades, transporting crude oil on the company’s pipelines and trucks, and marketing crude oil to major integrated oil companies. The segment’s operations are affected by overall levels of supply and demand for crude oil and relative fluctuations in market-related indices. Its top line and bottom line is affected when there is a high level of market volatility, favorable basis differentials, and a steep contango or backwardated structure. Contango is when the price of crude oil for future delivery is higher than current prices.

Acquisition &amp; MarketingEnlarge Graph

In 1Q14, the company’s purchase of crude oil increased by 14.4% while its gross profit per barrel purchased decreased by 62.2% as compared to 4Q13. EBITDA for 1Q14 declined by 63.6% from 4Q13, driven primarily by significantly contracted crude differentials, while higher volume was possible from higher market demand and the expansion in the crude oil trucking fleet.

SXL usually enters into annual contracts with the producers on a renewable basis. The company engages a large number of producers with short-term rates. As a result, the company is susceptible to the oil market conditions. During the end of 2013 and beginning of 2014, the oil market faced a situation of backwardation. A backwardated market has a positive impact on the lease gathering margins because crude oil gatherers can benefit from prompt deliveries. In this environment, there is little incentive to store crude oil, as current prices are above delivery prices in the future markets.

Sunoco Logistics Partners L.P. (SXL) is a master limited partnership (or MLP) that operates in the midstream business. The general partnership (or GP) interest of SXL is owned by Energy Transfer Partners (ETP); while the GP interest of ETP is owned by Energy Transfer Equity L.P. (ETE). Other energy players operating in the same sector as SXL include Enterprise Products Partners L.P. (EPD), Plains All American Pipeline L.P. (PAA), and Energy Transfer Partners L.P. (ETP). All of these companies are components of the Alerian MLP ETF (AMLP). ETE is a component of Global X MLP & Energy Infrastructure ETF (MLPX).

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