Energy Transfer Partners LP (ETP)

[Enterprising Investor]

Sunoco's Family Values Charm Energy Transfer (4/30/12)

By LIAM DENNING
Sunoco, which started life in the 1880s and has merged several times over the years, is heading down the aisle again. But new groom Energy Transfer Partners ETP is more interested in Sunoco's four kids.

Those four are the gasoline stations, the remaining refining assets, and Sunoco's 32.4% limited-partner stake and general-partner stake in Sunoco Logistics Partners. It is the latter two progeny ETP really loves—but the other two also have their uses.

Sunoco Logistics is a master limited partnership, or MLP, operating an extensive network of refined product pipelines, terminals and trucks. ETP wants to reduce its reliance on shipping natural gas across Texas, where profitability has dropped significantly, says Darren Horowitz of Raymond James.

But Sunoco Logistics is expensive, yielding 4.2% against an MLP-sector average of 6.1%. It is also conservatively managed, historically paying out just half of its distributable cash flow to unit holders. ETP will boost those payouts.

Brad Olsen of Tudor, Pickering, Holt & Co. estimates ETP is paying 32 times estimated 2013 cash flow for the general partner interest in Sunoco Logistics. But at a higher payout ratio, that drops to about 25 times. In comparison, Kinder Morgan Inc. paid an implied 40 times for the general partner interest in El Paso last year, says Mr. Olsen.

On that basis, ETP is getting a relative bargain. For that, it can thank the two problem children: refining and marketing. The potential complications involved in selling the stations and selling, closing or repurposing the refining assets deter many investors, allowing ETP to access Sunoco Logistics by acquiring the troubled parent at a discount. Given this, ETP's only real concern with Sunoco is likely to be the potential emergence of a brave rival offering a bigger engagement ring for the old lady's hand.

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