We have upgraded our recommendation on
NuStar Energy L.P.
(
NS
) - owner/operator of crude oil and refined products pipelines and
storage facilities - to Neutral from Underperform, reflecting a
balanced risk/reward profile.
San Antonio, Texas-based NuStar - which was spun off from the U.S.
refiner
Valero Energy Corp.
(
VLO
) in 2006 - engages in the transportation and storage of crude oil
as well as refined products in the U.S., the Netherlands Antilles,
Canada, Mexico, and the U.K. The partnership is one of the largest
asphalt refiners and marketers in the U.S. and the second largest
independent liquids terminal operator in the nation.
We like NuStar for its diversified asset base and robust
distribution-growth prospects. A strong pipeline of organic growth
projects and contribution from acquisitions provide the partnership
with an above peer-group average distribution coverage ratio.
NuStar has a track record for consistent distribution growth - its
current quarterly distribution of $1.095 per unit ($4.38 per unit
annualized) is up approximately 120% over its distribution rate of
$0.5011 per unit ($2.00 per unit annualized) at the time of its IPO
in 2001.
Furthermore, the majority of NuStar's business is derived from an
attractive set of fee-based storage and transportation assets that
support the U.S. and international energy infrastructure.
Over the last few years, the partnership has consolidated its
business through a combination of organic efforts and accretive
acquisitions. We also welcome NuStar's announcement to sell a 50%
stake in its volatile asphalt operations.
However, we believe these positives are already reflected in its
current valuation, so there is not much upside from the current
price level.
NuStar recently reported grim second-quarter 2012 results, with
earnings per unit (EPU) of 6 cents that came significantly lower
than the Zacks Consensus Estimate of 52 cents. Comparing year over
year, reported result declined heavily from the adjusted profit of
$1.34. The underperformance was mainly on account of losses in its
asphalt and fuel marketing segment (which contribute roughly half
of total profits).
We also remain concerned about NuStar's high debt levels, which
leave the partnership vulnerable to an extended downturn. As of
June 30, 2012, NuStar had debt (including current portion) of more
than $2.6 billion, representing a debt-to-capitalization ratio of
52.0%.
Given these concerns, we see NuStar units performing in line with
the broader market. Our new long-term Neutral recommendation is
supported by a Zacks #3 Rank (short-term Hold rating).
NUSTAR ENERGY (NS): Free Stock Analysis Report
VALERO ENERGY (VLO): Free Stock Analysis Report
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