On Feb 12, 2013, we upgraded San Antonio-based publicly traded
NuStar Energy L.P.
) to Neutral from Underperform, reflecting a balanced risk/reward
profile. Our new investment thesis is supported by a Zacks Rank
MCDERMOTT INTL (MDR): Free Stock Analysis
NUSTAR ENERGY (NS): Free Stock Analysis
PATTERSON-UTI (PTEN): Free Stock Analysis
VALERO ENERGY (VLO): Free Stock Analysis
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Why the Upgrade?
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
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 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 recently formed asphalt
joint-venture partnership with a private investment firm that is
aimed at reducing the pipeline operator's unpredictability about
its future cash flows, while trimming the requirement for large
working capital investment.
However, we believe these positives are already reflected in its
current valuation, so there is not much upside from the current
NuStar - which was spun off from the U.S. refiner
Valero Energy Corp.
) in 2006 - recently reported grim fourth-quarter 2012 results,
with earnings per unit (EPU) of 25 cents that came lower than the
Zacks Consensus Estimate of 31 cents. Comparing year over year,
reported result declined from the adjusted profit of 30 cents.
The underperformance was mainly on account of higher operating
expenses in its storage business.
We also remain concerned about NuStar's high debt levels, which
leave the partnership vulnerable to an extended downturn. As of
Dec 31, 2012, NuStar had debt (including current portion) of $2.4
billion, representing a debt-to-capitalization ratio of around
Stocks that Warrant a Look
While we expect NuStar to perform in line with its peers and
industry levels in the coming months and advice investors to wait
for a better entry point before accumulating shares, one can look
McDermott International Inc.
Patterson-UTI Energy Inc.
) as good buying opportunities. These energy equipment suppliers
- sporting a Zacks Rank #2 (Buy) - have solid secular growth
stories with potential to rise from current levels.