NuStar Energy, L.P.
/ (NS-NYSE)/ Equity Research / NS | Page 1
Current Recommendation / NEUTRAL
Prior Recommendation / Underperform
Date of Last Change / 09/26/2013
Current Price (03/12/15) / $60.71
Target Price / $63.00
SUMMARY
We are maintaining our Neutral recommendation on NuStar Energy units with a target price of $63.00, which reflects a balanced risk/reward profile. The partnership owns a high-quality, large and diverse asset portfolio. Other positive attributes include its investment grade rating and strong track record for distribution growth. We also appreciate the partnership’s expectation of a year-over-year earnings increase from its major segment in 2015. However, we believe these positives are already reflected in its current valuation, so there is not much upside from the current price level. We are also concerned about the partnership’s high leverage. As such, we see NuStar units performing in line with the broader market./ Equity Research / NS | Page 1
SUMMARY DATA
52-Week High / $67.1252-Week Low / $51.53
One-Year Return (%) / 23.61
Beta / 0.88
Average Daily Volume (sh) / 223,818
Units Outstanding (mil) / 78
Market Capitalization ($mil) / $4,728
Short Interest Ratio (days) / 7.18
Institutional Ownership (%) / 45
Insider Ownership (%) / 2
Annual Cash Dividend / $4.38
Dividend Yield (%) / 7.21
5-Yr. Historical Growth Rates
Sales (%) / -8.1
Earnings Per Unit (%) / -22.2
Dividend (%) / 0.6
P/E using TTM EPU / 28.4
P/E using 2015 Estimate / 24.2
P/E using 2016 Estimate / 21.5
Zacks Rank *: Short Term
1 – 3 months outlook / 3 - Hold
* Definition / Disclosure on last page
Risk Level * / Below Avg.,
Type of Stock / Large-Blend
Industry / Oil/Gas Prod Pi
Zacks Industry Rank * / 155 out of 267
OVERVIEW
San Antonio, TX-based NuStar Energy, L.P. (NS) is a master limited partnership (“MLP”) that 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 the second largest independent liquids terminal operator in the nation. NuStar’s current asset base includes 8,643 miles of pipelines and82 terminal and crude oil storage tank facilities. The partnership's combined system has approximately 91 million barrels of storage capacity.
NuStar Energy’s general partner (“GP”) – NuStar GP Holdings LLC – was previously owned by Valero Energy (VLO), which also maintained a limited partner interest in the partnership. In the wake of the GP’s IPO and a follow-on offering in 2006, Valero Energy no longer has any financial interest either in the partnership or the GP. As a result, the partnership changed its name from Valero L.P. to NuStar Energy L.P. in 2007. NuStar reports its operation under three business segments: Storage, Pipeline and Fuels Marketing.
- The Storage segment (with 54 terminals in the U.S.having the total storage capacity of 53.4 million barrels) provides storage and handling services for petroleum products, specialty chemicals, crude oil, and other liquids. This segment offers tug assistance, line handling, launch service, emergency response services, and other ship services. NuStar also owns international refined product terminal operations in the Caribbean, Canada, the U.K, the Netherlands and Mexico, as well as 60 crude oil and intermediate feedstock storage tanks and related assets.
- The Pipeline segment carries crude oil and other feedstocks such as gas oil, besides refined petroleum products such as gasoline, diesel, jet fuel, natural gas liquids, blendstocks, and other products. It owns 5,463 miles of refined product pipelines, along with 2,000 miles of anhydrous ammonia pipelines. This segment also consists of 940 miles of crude oil pipelines (which transport crude oil and other feedstocks such as gas oil) with crude oil storage facilities of 1.9 million barrels of capacity. .
- The Fuels Marketing segment was used for the partnership’s fuels marketing operations and the asphalt business till Sep 28, 2012. NuStar – through its fuel operations – engages in buying crude oil and refined petroleum products for resale. Previously, the partnership owned two asphalt facilities – a 74,000 bpd asphalt refinery in Paulsboro, New Jersey and a 30,000 bpd asphalt refinery in Savannah, Georgia (now being operated only as a terminal) –together with terminal facilities capable of storing 5.3 million barrels. However, through two transactions in Sep 2012 and Feb 2014, NuStar sold 100% interest in its asphalt operations to a privately held investment firm.
REASONS TO BUY
We like NuStar Energy 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. 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.
NuStar’s joint initiative with oil and gas company EOG Resources – a 70,000 bpd rail offloading facility in St. James, LA to transport and store crude oil produced from Bakken, Eagle Ford and other developing shale plays in the country –offers greater market opportunities for the partnership’s customers and benefit the storage segment.
During the last few years, NuStar has invested handsomely on several internal growth projects that are likely to add to the partnership’s future profitability. NuStar started operating two pipelines in the Eagle Ford Shale and finished working on the St. James, Phase I terminal expansion project. With an enhanced storage capacity of 8.2 million barrels (up 3.2 million barrels), this became NuStar’s second largest storage terminal asset.
NuStar expects a year-over-year improvement in its 2015 operating earnings for its Pipeline and Storage segments, backed by higher throughput volumes and contribution from recent acquisitions.
NuStar has a track record of 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 2001 IPO.
REASONS TO SELL
The demand for transportation and storage services are directly linked to the price of the underlying commodities. With the current weakness in oil prices and upstream firms reducing their expenditure on exploration activities, the demand for such services are likely to be impacted significantly.
Over the last few years, NuStar has consolidated its business through a combination of organic efforts and accretive acquisitions. We believe the higher operating expenses associated with this expanded asset base may lead to reduced returns going forward.
Acquisitions have historically played a major role in the partnership’s growth profile and are expected to remain significant in the future. NuStar may find it difficult to complete accretive transactions moving forward, which could negatively impact its growth rate.
We remain concerned about NuStar’s high debt levels, which leave the partnership vulnerable to an extended downturn. As of Dec 31, 2014, NuStar had total debt of $2.8 billion, representing a debt-to-capitalization ratio of 62%.
Unfavorable regulatory changes by the Federal Energy Regulatory Commission (“FERC”) would impact the partnership’s results. This will also contribute toward increasing NuStar’s borrowing costs and depressing the market value of its limited partner units
RECENT NEWS
Fourth Quarter 2014 Results
On Jan 30, 2015, NuStar Energy reported strong fourth-quarter results backed by improved performances across its Pipeline and Storage segments. Earnings per unit (EPU) from continuing operations came in at $0.55, beating the Zacks Consensus Estimate of $0.53. The bottom line also increased from the year-ago quarter figure of $0.21 per unit.
However, quarterly revenues of $681.7 million failed to meet the Zacks Consensus Estimate of $793 million and were also below of the year-ago level of $785.4 million. Lower contribution from the Fuels Marketing segment affected the results.
Quarterly Distribution
NuStar announced quarterly distribution of $1.095 per unit ($4.38 per unit annualized), which remained unchanged from the previous quarter’s distribution.Distributable cash flow (DCF) available to limited partners for the third quarter was $95.4 million or $1.23 per unit (providing 1.12x distribution coverage) compared with $75.3 million or $0.97 per unit in the year-earlier quarter.
Segmental Performance
Pipeline: Total quarterly throughput volumes in the Pipeline segment were 1,024,490 barrels per day (Bbl/d), up 14.7% from the year-ago period.Throughput volumes in crude oil pipelines increased about 30% from the year-ago quarter to 490,969 Bbl/d. Moreover, throughput revenues rose 19.2% to $130.8 million. The segment’s operating income was up 12.1% year over year to $66.4 million on an increase in throughput volumes.
Storage: Throughput volumes in the Storage segment rose 13.8% year over year to 918,929 Bbl/d.Quarterly revenues were up about 7% year over year to approximately $143 million. The segment reported a profit of $41.7 million against a loss of $266.9 million in the year-ago quarter. Higher throughput volumes and revenues led to the improvement.
Fuels Marketing: The unit reported an income of $2.9 million, against the year-ago quarter income of 7.1 million. Lower product sales and higher operating expenses hampered the results.
Balance Sheet
As of Dec 31, 2014, the partnership had a total debt of $2,826.5 million, representing a debt-to-capitalization ratio of 62.2%.
2015 Guidance
NuStar expects first-quarter 2015 operating earnings for its Pipeline and Storage segments to be higher than the profit made a year ago. Moreover, the partnership projected that its Pipeline segment's operating income would be $25–$45 million higher than the 2014 level. The partnership stated that the Storage segment’s operating income is expected to be $10–$30 million higher than last year. Also, operating earnings from the fuels marketing segment is expected between $20 million and $30 million. The partnership anticipates that it would be able to cover its distribution in 2015 as well.The partnership plans to invest $400–$420 million in organic growth projects in 2015.
NuStar Energy Obtains Full Ownership in Linden Terminal
On Jan9, 2015, NuStar Energy announced that it now has complete ownership of a refined products terminal in Linden, NJ, in the New York Harbor. The San Antonio, TX-based publicly traded partnership previously had 50% stake in the facility, the remaining being held by its joint-venture partner Linden Holding Corp., an affiliate of NIC Holding Corp. The transaction is valued at $142.5 million.
The Linden terminal has a storage capacity of 4.3 million barrels of refined products comprising gasoline, jet fuel and fuel oils. Moreover, the facility has a deep-water ship dock and one barge dock. It is linked to the Colonial and Sun pipelines for inbound and Buckeye Pipeline for outbound connections.
NuStar Energy expects the deal to be immediately accretive to 2015 earnings. Post-transaction, the partnership expects an addition of about $20 million to its earnings before interest, taxes, depreciation and amortization (“EBITDA”).
Management at NuStar Energy said that this strategic move will not only strengthen its presence in the New York Harbor and the East Coast region, but will also provide expansion opportunities.
NuStar Energy added that the Linden terminal being adjacent to the Linden NuTop terminal (fully owned by NuStar), the partnership would be able to generate greater efficiency from both the terminals. The NuTop terminal has refined product storage capacity of about 389,000 barrels.
VALUATION
NuStar owns a high quality, large and diverse asset portfolio with operations in eight different countries. It is the fourth largest independent liquids terminal operator in the world and second largest in the U.S. Over the last few years, the partnership has consolidated its business through a combination of organic efforts and accretive acquisitions. Other positive attributes in the NuStar story are its investment grade rating and strong track record for distribution growth.
However, we remain concerned over the company’s high debt levels. Also, cost overruns on expansion projects (that leads to lower returns) couldfurther add to the challenges.
As such, we continue to rate NuStar units as Neutral.
NuStar’s current trailing 12-month earnings multiple is 28.4X, compared with the 40.2X industry average and 17.8X for the S&P 500. Over the last five years, NuStar’s units have traded in a wide range of 15.8X to 95.2X trailing 12-month earnings.
Our $63 price objective reflects a 2015 P/E multiple of 25.1X.
Key Indicators
Earnings Surprise and Estimate Revision History
DISCLOSURES & DEFINITIONS
The analysts contributing to this report do not hold any shares of NS. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts’ personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts’ compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1129 companies covered: Outperform - 15.4%, Neutral - 74.9%, Underperform – 8.9%. Data is as of midnight on the business day immediately prior to this publication.
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