NuStar Energy's Management Presents at Credit Suisse MLP and Energy Logistics Conference (Transcript)

| About: NuStar Energy (NS)

NuStar Energy L.P. (NYSE:NS)

Credit Suisse MLP and Energy Logistics Conference Call

June 26, 2013 15:30 ET


Steve Blank - Chief Financial Officer

Unidentified Analyst

Next up we have got NuStar Energy, and with me today is Steve Blank, CFO of NuStar as well as Chris Russell, Director of Investor Relations. And with that, I will turn it over to Steve.

Steve Blank - Chief Financial Officer

Thanks. Good afternoon everybody. Presumably, green button, here we go, forward-looking statement, thank you, don’t have my reading glasses on I should know better. We have two publicly traded companies. There is NuStar LP which is an MLP we have IPOed back in 2001 that has a market capital of approximately $3.4 billion. And NSH is NuStar GP Holdings, we IPOed that in 2006. That has a market capitalization of around $1 billion. We were part of Valero until 2006 when we IPOed the general partner. We divorced ourselves legally from Valero. There is still a sizable customer of ours. Probably 15% to 25% of our operating income comes from serving Valero. Bill Greehey, you see a box to the upper right, he was the former Chairman and Chief Executive Officer of Valero is our Chairman now, and he is the largest owner of the holding company, which has got the symbol NSH owning about 19%.

Here is the map showing our operations. We are a little bit unusual for an MLP in that. While we have most of our assets in the United States, we also have operations in other countries, most notably Canada, Mexico, the Netherlands, including a Dutch island in the Caribbean called St. Eustatius, which is actually our largest storage facility with about 13 or 14 million barrels. We are in the UK and also we have a joint venture interest with a partner in Turkey. We own 87 terminals and storage facilities and have approximately 100 million barrels of storage capacity, which makes us one of the biggest storage companies in the United States and even the world. We have about 8600 miles of pipe, crude oil, and refined product pipeline, and we do have a 50% interest in a joint venture, that owns asphalt terminaling and refining business with a throughput capacity of about 75,000 barrels per day. That refinery is near Philadelphia.

This shows our operating income by segment. Storage, again, where we have nearly 100 million barrels of storage is our biggest segment with 53% of our operating income in 2012, pipeline is at 43%, and fuels marketing pro forma for taking out the asphalt joint venture and also the income earned from our refinery in San Antonio, which we sold in January this year. So, pro forming our 2012 results for those disposals was only about 4%. So, about 96% of our business came from highly stable fee-based pipeline and storage assets. This year we think that number will be about 90% because of the fuels marketing segment should do consumably better than it did last year.

This shows our distribution growth for both companies. There has been a little bit of a stall in the trajectory for NS, which is part of the reason why the stock is yielding so much, because we are just not getting paid in the current share price for distribution prospects, and I will talk a bit about that more in a little while.

Last year, we spent a lot of time strategically redirecting the firm. We had bought this asphalt refining marketing business back in ‘08. We were making money for the first three and a half years, not great money, but for a refining business, it was doing pretty well and then the WTI/Brent differential showed up about this time in 2011, this time of year in 2011, and the business started losing money. So, we last year formed a joint venture with a private equity firm here in town called Lindsay Goldberg and basically got those numbers for the most part out of running through our debt-to-EBITDA numbers. We also, as I mentioned, sold San Antonio refinery in January of this year to Calumet and really redirected the company back to its historical pipeline and storage routes. We raised a considerable amount of money by doing Lindsay Goldberg deal and selling the refinery to Calumet and plowed all of that into the Eagle Ford, I mean, money is spongeable, but at the same time that we are closing those deals. We were buying from two private equity firms some assets that they controlled in a company called TexStar and I’ll talk about that in a while.

So, first, the smallest segment, the fuels marketing segment there as I mentioned we did formd this joint venture, that raised total proceeds of about $450 million, which we used to pay down outstanding debt. It’s now deconsolidated those results from our operations. We sold the refinery for $115 million. The fuels marketing segment is expected to generate about $20 million to $40 million of EBITDA in 2013 and 2014.

On to storage, our biggest segment there in 2012 we earned about $290 million of EBITDA that is expected to be pretty comparable to what we expect to earn in 2013. We are benefiting from a railcar offloading facility that we completed in April of 2012 at our St. James, Louisiana Terminal facility. And that benefit is somewhat offset by a reduced profit-sharing arrangement that we have on that unit train, where for every amount above I think it’s $7 on a WTI LLS differential. We get a 10% keep of that margin with the customer. That was quite good last year. It’s looking like it won’t be quite as strong this year. Backwardation is also affecting us somewhat on the storage side, most notably in the West Coast market and some locations, one location on the East Coast and one location in mobile.

This is a picture of our St. James facility, which is probably our third largest facility at 9 million barrels. We just completed in January a 700,000 barrel expansion for customer and we are doing a plan to do additional work here and we are in active discussions with some customers about building additional tankage. This is a picture of the unit train. The first one was, which came online of April of last year, we did for EOG. That’s the one with the profit-sharing arrangement. We have signed a second one basically a mere of the first with a company called Great Northern, total cost of around $45 million, expected to be in-service in the fourth quarter of this year with annual EBITDA on the $15 million to $20 million range.

On the pipeline segment, we expect about $50 million to $70 million higher in EBITDA in 2013 than the 2012 number, which was $211 million. The pie chart shows the different types of crude oil, gasoline, distillate removing. The Eagle Ford pipeline expansion projects that were completed in the last half of 2012 and later this year plus benefits from the December TexStar acquisition should contribute to this $50 million to $70 million higher in 2013 and in 2012. We did have some operating issues on the stuff we acquired from TexStar in the first quarter couple of pipeline leaks and needed to get some additional piping, or I should say, pumping equipment in that hurt us in the first quarter. We only were moving about 65,000 barrels per day since we have been moving about 95,000 barrels, and this will gradually ramp up during the course of the year as we put some additional more powerful pumps on the system and de-bottleneck further.

We were one of the first to transport Eagle Ford Shale crude oil via pipeline. We moved it for Coke, then for Valero. We have had four completed projects, which total expenditure of $150 million. We’ve built the pipeline for Valero, reversed a couple of lines to hide TexStar assets into big 16-inch line. We have that M&A set a terminal in Oakville and then runs down to Corpus. So, the $150 million that we spent for these projects we expect around $30 million of EBITDA.

We also announced last year a expansion for ConocoPhillips, its supported by a 10 year take or pay contract. We’re constructing 100,000 barrel terminal facility and truck offloading facilities and pipeline connection to a pipeline that we had in Pettus that will connect in at Oakville to the 16-inch line. It’s a 30,000 barrel per day minimum commitment we expect that we want to move more. We expect to tie them in by pipeline in the fourth quarter of this year. Right now, they are moving barrels by truck into the terminal and then getting into the pipeline going down to Corpus.

Importantly we’re doing improvements on a dock that we share in Corpus, but we are also building a new dock down in Corpus to be completed in the first quarter of 2014 that will really de-bottleneck. The crude systems will be able to get people into the Corpus refining grid on to the water we should be able to move nearly a quarter of the million barrels over our docks in Corpus. We also have a pipeline running from Corpus to Houston, which is currently being re-commissioned and refined service and hope to make an announcement on that fairly soon. Total NuStar spending should be in the $120 million to $140 million range and generating about $50 million of annual EBITDA for this Conoco deal alone and that’s just based on a minimum 30,000 barrel per day commitment.

This slide talks about the TexStar deal, we paid $325 million to buy the crude gathering system from the private equity firms that controlled it. It ties into 16-inch line again that we had running down to Oakville provides us access to dedicated production acreage with BlueChip customers are bringing the crude into the various terminals and to the lack units and getting into the pipeline through its feeder lines that come into a big line we call the Choke Canyon line, which is 16-inch line. It’s currently shipping around 95,000 barrels per day on that line, should be to 100 by the end of 2013 and probably 135 by early ‘14. Acquisition is expected to provide just $10 million to $30 million of EBITDA this year as we ramp up, but by 2015 as we expand the system we expect $50 million to $70 million of EBITDA.

This shows a map of our system. It shows the different zones in the Eagle Ford. There is a brown squiggly line. I don’t know if you can see it, but that’s the former TexStar pipeline coming into Three Rivers, where Valero has a refinery and then Conoco to the east ties into Pettus, then across the Three Rivers and down the 16-inch. We also have pipelines into Nuevo Laredo and Laredo down to Harlingen and up to Houston, which all may find further service for Eagle Ford. Here is the ramp up that we expect in the fourth quarter we were doing about 150,000 barrels per day of the Eagle Ford. Fourth quarter of this year we should be up to 225 and ultimately up to 375. We do have capacity in excess of that to about 100,000 barrels per day in excess.

Quick financial overview, this shows our debt profile and our cap – capitalization. This is pro forma for repaying some bonds under our revolver on June 3rd, so we show $530 million being drawn under that $1.5 billion revolver. We have about $650 million of capacity under that revolver, so we have very good liquidity. This shows the maturity profile having refinanced that bond with drawn to the revolver, our next maturity is 2017 when our revolver comes to. We did do earlier this year some junior subordinated notes and we show that here being cope in 2018 but the final maturity could be as long way as 2043.

Internal growth projects spending is shown here $374 million last year and $400 million to $450 million range in 2013 for internal growth. Coverage ratio guidance, we did lower couple of the segments here in this presentation. Pipelines, we lowered albeit by about $10 million and the storage segment we lowered in a range of $10 million to $30 million. Despite that lower guidance, we still expect that will be close to one-to-one cover in the fourth quarter. We had been saying one cover. Now, we are saying slightly below one cover. It really doesn’t change at all how we view the business and the prospects for the business. So, we still have no plans to cut, which a lot of people ask us about either NuStar or in a derivative fashion, NSH quarterly distributions. We will be working on our 2014, but we started working on our 2014 budget. It will be ready probably late October, early November and we would expect to share not only 2014 guidance then, but probably also give color on 2015, so much of the capital that we have been spending really bears fruition both in 2014, but even more so in 2015.

And then in conclusion, we have a high quality of large and diverse assets on the pipeline and storage side. We have redirected the firm away from the stuff that really was playing the valuation as best we could with the formation and the joint venture and the sale of the refinery to Calumet. We got a great customer base. We do business with major oil companies, national oil companies, strong refiners, and trading houses, pretty strong balance sheet, particularly given our business. We did get downgraded recently by the agencies because of the underperformance of asphalt. It wasn’t a surprise. They had warned us for years that what would cause the downgrade would be underperformance by asphalt, and when it started losing money instead of making money, they had no choice. So, we are living with that higher cost of interest expense as a result of their move and that’s it. That’s our story and happy to take any questions if anybody had some. Chris Russell, our Treasurer and IR guy can answer it if I can’t. Any questions? Yes.

Question-and-Answer Session

Unidentified Analyst

(Question Inaudible)

Steve Blank

Yes, it’s contracted. It’s going to be about 70,000 in total capacity, but I think we have signed this at 30.

Unidentified Analyst

30 to 40?

Steve Blank

30 to 40 with Great Northern. So, it’s a three-year contract. We get all our money back in our return just in that brief period. If the reason for having that for them, wanting that goes away, we still having gotten all our money back since it just makes the terminal even better, because we have got a lot of unit train opportunities there. We can handle 270,000 barrel per day unit trains. As part of that project, we have made improvements to the doc. So, ships get loaded faster, because we are putting a marine vapor destruction unit on it. So, that’s very attractive to customers. And you might have noticed in the photo, we have a lot of land to build. So, we have 900 acres. So, there is a lot of land behind the tanks you see that we could expand depending upon peoples’ desire.

Unidentified Analyst

(Question Inaudible)

Steve Blank

Not much, we are still kicking around things on St. Eustatius, but it’s uncertain what we'll do there. Candidly, it’s further complicated by the fact that it’s now Dutch kicking along in Netherlands and Italy. So, we are working through tax issues. So, if we were to bill it there, how much do they want to take of it? I would say that’s kind of a distant third to what we have opportunity wise in neither at the Eagle Ford and St. James. Also in Point Tupper, where we have a large break bulk facility, we are thinking through is they are used for Canadian rail to come in there. This is very deepwater, where we are and we have sometimes 11 million barrels storage. Traditionally, ConocoPhillips has used that break bulk and bring crude down to East Coast to refiners that payout. Yes. Anybody else? Great, well, thank you for your attention. I appreciate it.

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