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

Part 6
Must-know: Analysis of Sunoco Logistics' first quarter earnings (Part 6 of 8)

Must-know: Oil transportation in the Permian Basin

The Permian Express 1 and 2 projects involve the construction of approximately 300–400 miles of new crude oil pipelines, that originate in multiple locations in West Texas. The Permian 1 Express is scheduled to have a capacity of pipeline throughput of 150,000 barrels per day by end of 2Q14. With an expected initial capacity of approximately 200,000 barrels per day, Permian Express 2 is expected to deliver to multiple refiners and markets beginning in the second quarter 2015. The pipelines have fee-based income which provides stability to the company’s earnings from the typical volatility of commodity prices.

PermianEnlarge Graph

The Permian Basin is a significant oil producing area that surfaced during the recent surge of oil production in the U.S. In recent years, U.S. oil production has been increasing rapidly, in part due to growth in the Permian Basin, located in western Texas and eastern New Mexico. The U.S. Energy Information Administration (or EIA) expects U.S. crude oil production to rise from approximately 7.4 million barrels per day in 2013 to approximately 8.4 million barrels per day in 2014. The majority of the growth will come from the Williston Basin in western North Dakota and eastern Montana (primarily the Bakken formation), the Western Gulf Basin in south Texas (primarily the Eagle Ford formation), and the Permian Basin (primarily the Spraberry and Wolfcamp formations). The company now estimates that over 200,000 barrels per day of annual production growth will come from the Permian region.

Michael J. Hennigan, the president and the CEO of SXL, said in the conference call of 1Q14 “we’re very pleased to announce the successful open season for our Permian Express 2 project, which will increase the takeaway capacity out of the Permian Basin by approximately 200,000 barrels per day, providing access to multiple markets and is expected to be operational in the second quarter of 2015. With the success of this open season and some capital spend timing updates on our previously announced projects, we’re increasing our capital guidance for 2014 by $400 million to $1.7 billion.”

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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