NuStar Energy L.P (NYSE:NS)
Wells Fargo MLP, Pipeline & Energy Conference
December 10, 2013 03:20 PM ET
Curt Anastasio - President and CEO
Steve Blank - EVP and CFO
Brad Barron - EVP and General Counsel
Ross Payne - Wells Fargo Securities, LLC
Ross Payne - Wells Fargo Securities, LLC
Our next presenter is NuStar Energy L.P. NuStar recently reduced its ownership position in the Asphalt business notably and is now fully focused on its core businesses. We are glad to have with us today Curt Anastasio, CEO and President; Steve Blank, Executive Vice President and CFO and Brad Barron, EVP and General Counsel. Curt?
Thank you, Ross. Let me begin with just an overview of NuStar for those who may not be familiar with the Company. We actually have two public companies. We have a public GP, NuStar GP Holdings, LLC which is the ticker NSH and our operating MLP is NuStar Energy and has market cap of about $4 billion for NuStar Energy and little above -- little over $1 billion, about a $1.2 billion for NuStar GP Holdings. We went public in April of 2001.
This attempts to depict on one page the assets of the Company, but essentially we have three business segments. We have Pipelines, Storage Terminals and what we call Fuels Marketing. And the Pipeline and Storage terminals after a strategic redirection of the company over the last couple of years amounts to more than 95% of our business, when you look at cash flow or earnings. So we’re more than 95% now, a fee-based MLP.
Just to use the map -- referring to the map for a moment, the Pipeline business is predominantly crude oil and refined petroleum products. The pipelines are centered in the central part of North America all the way from northern Mexico, up to North Dakota and near the Canadian border.
And as I mentioned its crude oil refined petroleum products and we also have the largest ammonia transportation system in the country over 2,000 miles of ammonia pipeline, which goes from the Louisiana Gulf Coast up throughout the Corn Belt and helps to fertilize the Corn Belt of the United States. And there are some terminals that as you see those little dots on the pipeline system associated with those pipelines.
And our Storage terminal business is scattered around -- in most of the United States on the coast and in the interior and also at a total of eight countries, including the United States. So we’re West Coast, U.S Gulf Coast, East Coast, the interior of the country, and the bottom center of the map you see our European operations, its United Kingdom, you see there England, Ireland, Scotland products terminals and also in Amsterdam and Holland, in the Netherlands. We have a significant products trading terminal and also in the Eastern Mediterranean and Turkey we have two adjacent terminals.
Then in the bottom center, you see our single largest terminal, it’s a 14 million barrel deep-water terminal of crude oil and refined products in a place called St. Eustatius in the Caribbean that’s near [ph] St Maarten for those of you a more familiar island that probably for many of you vacationers.
And then in eastern Canada all the way in the upper right part of this map, Point Tupper, Nova Scotia we have a terminal that’s 7.5 million barrel deep-water terminal crude oil and refined petroleum products. And we’re at close to 100 million barrels of storage capacity, one of the worlds largest liquids terminal operators.
We also have a third part of our business, its called Fuels Marketing. This is now less than 5% of our business. This is where we used to have the Asphalt Refining and Marketing business. This has now been pushed out to a JV with a private equity firm. So what’s left in there is bunker and fuel oil marketing which we do principally in two locations, Texas City and St. Eustatius in the Caribbean. A little bit of crude trading around St. James, Louisiana and a butane blending operation in part of our products pipeline system and that’s what left in that 4% to 5% of the business in Fuels Marketing.
Majority of NuStar’s operating income as I just mentioned, is generated by fee-based Storage and Pipeline segments close to 96%. And here you see how it was broken up for full year 2012 and full year 2013 wouldn’t be much different. Although you would see a little higher proportion in the pipelines than you see for 2012 because of the growth in our Pipeline segment that has started up, but you see Storage 53%, Pipeline is 43% and Fuels Marketing 4%. So it’s about 96% of operating income excluding the Asphalt piece in the JV and the San Antonio refinery which we had for a bit of time in 2012 came from the fee-based storage and pipeline system. That refinery by the way was also divested and we’re out of that.
We’ve announced publicly, very publicly 15 months ago, a strategic redirection of the Company and a change in our focus and that involved selling 50% of our Asphalt business on September 28th of ’12. We sold the fuels refinery that we had in January of ’13. We eliminated the refinery hedges and other activities associated with all refining and marketing and we use the proceeds of the sales transactions mainly to invest in the Eagle Ford, which I will talk more about in a moment to reduce our debt. And we continue to pursue divestiture in the balance of the 50% ownership in the Asphalt JV and we’re in advanced stage of negotiations to do the rest of that.
So obviously we’ve been focused on growing the fee-based side of the business, which is something we did in this company for our first 9, 10 years of existence before we did foray into refining. We’ve closed on the Eagle Ford Shale crude oil pipeline acquisition. We are concentrating on the shale growth projects and we’re continuing to develop some storage terminals. We recently did another unit train deal at St. James. We’ve been leasing up idle storage tanks and reactivated an idle 12-inch line that will connect our -- will connect Mont Belvieu to our Corpus Christi terminal and that deal the majority of the capacity of that pipeline is one that we recently announced.
Fuels Marketing segment update. Having talked a little bit about the Storage and the Pipeline, going forward we will have much less volatility in the company and lower capital requirements in the segment. All that’s left in there I’ve told you already, it’s a bunkering and fuel oil, the crude oil trading and the butane blending.
In August of 2013, we significantly reduced the working capital in this business by entering into a back-to-back supply agreement for St. Eustatius with a storage customer who supplies the bunker operation now and that obviously helps to produce an increase in the profitability of the business. We have less carrying costs and also we’ve reduced operating expenses relating to that business, mainly in marine transportation.
The Fuels Marketing currently pays the Storage segment approximately $30 million in annual storage fees. So in other words one of the reasons we’re in this at all in the bunker and fuels marketing business is that its complimentary to our storage assets and they’re able to drive from third parties enough revenue to cover -- more than cover the storage rates that’s paid to our Storage segment and on top of that they try to trade to make a profit. So as long as they can do that they’re -- it’s worthwhile to stay in the business.
In 2013, fuels marketing after paying the $30 million, they’re expected to be about breakeven. We do see in the bunker business not just those, but everybody globally in the business weaker demand than you’ve seen in recent years and increased competition mainly because the margins were so good the previous two years. And the results for Fuels Marketing operations are expected to improve in 2014 mainly because of a self help we’ve done on lowering the working capital, the back-to-back deal we did at St. Eustatius and the lower operating costs to be in that business.
Just quick update on the Asphalt JV. As I said, we sold our 50% interest in the Asphalt business to a private equity firm for a $175 million. They actually paid as a total of $450 million at that time, because they bought the working capital too. We took that $450 million and essentially reinvested it in the Eagle Ford Shale pipelines. We did in acquisition of a crude oil gathering and mainline system from a company called TexStar for $325 million and we invested additional capital and growth around that system, initially de-levering and then investing the capital in the pipeline business and that’s working out extremely well for us.
Another step we’ve taken that relates to the Asphalt JV is the old crude supplier agreement that we had for Asphalt with the Venezuelan. They have agreed to terminate it early effective June 1, 2014. That deal was to run until March of 2015 and that reduces the minimum payment commitments we would have otherwise had in this company by about $1 billion. So it’s a substantial de-risking of the company and eliminates a very substantial contingent risk that we would be stuck with this crude without an ability to resell it at a profit. So another very, very positive step for our company.
And as I mentioned we’re in advanced discussions with our Asphalt JV partner to divest the remaining, the 50% balance in the JV and the agreement is to reach what the outcome will be material reduction and the financial support that we supply to that business immediately, which today is in the form of a $250 million revolver and a $150 million of credit support. So once we do that deal, those are materially reduced, eventually they go away altogether and we will be out of the remaining equity interest altogether and that as you know has been a money loosing business for the last 2, 2.5 years and its not really expected to change very much going into ’14. So it will be yet another very positive step for our company. So all of this its part of the strategic redirection we announced in the last 15 months and we’re just about completed with it -- within less than 18 months.
Storage segment update. We expect 2013 storage to be about slightly lower about 5 million to 15 million lower than 2012 and then if we go into 2014 it should be about the same as 2013. When you have a 100 million barrels of storage, we do have some and in our case its maybe 5% to 10% of our storage that is affected by backwardation in the forward pricing curve and so that put some downward pressure on renewal rates, but I think really the worst of that is behind us and we have -- that has been offset some by benefits completing two St. James rail car offloading facilities as well as storage expansion projects that we completed early this year at St. James and St. Eustatius.
2014 segment EBITDA as I said should be comparable to 2013. So our growth right now is really been driven by the Pipeline segment. In previous years if you look at these bar graphs in the upper left, you go from 2006 to -- up to 2011or ’12 you see a very substantial increase in the Storage segment EBITDA. That’s now topping off and those similar looking graphs now will be on the Pipeline segment of our business instead of the Storage segment. And you can see on the upper right bar graphs that most about 2/3s of our contracts are long-term, meaning more than one year.
We recently completed the second unit train at our St. James facility. It’s backed by a long-term contractual take-or-pay commitment. It was put into service in mid November of 2013. The first one with EOG was completed back in April 2012 and that’s worked out very well. Each of those can handle 70,000 to 140,000 barrels per day and we spend about 45 million to do the second unit train with an annual EBITDA of $15 million to $20 million. So you could see it’s quite a high return project.
We continue to receive inquiries for more tankage at St. James and we bought this terminal in 2007. It had 2 million to 3 million barrels of storage. It now has nine and we think it will go probably up to something like 11 or 12. We completed a 700,000 barrel expansion in January, and as I say we’re getting strong interest in additional storage tanks at St. James which is really a premier location for us.
Pipeline segment update, this is really where the action has been starting this year and then going into the future especially. The growth in the Eagle Ford shale which is right in our backyard where we had assets already available underutilized to be converted to Eagle Ford service. That’s what's driving the future growth in the pipeline segment EBITDA. And 2013 this pipeline EBITDA is expected to be $60 million to $70 million higher than it was the previous year in 2012 and that’s relating to expansion projects we completed in the last half of ’12 and during ’13.
We did the TexStar acquisition which I mentioned which plugged right into existing assets we had and some FERC tariff adjustments. So that’s why ’13 is $60 million to $70 million higher in pipelines than it was in ’12. And then ’14 will be an additional incremental $40 million to $60 million on top of ’13, and that’s the pipeline expansion projects that we will have completed this year and then going into ’14 as well as some higher tariffs contributing to significantly higher 2014 results. So you could see well over $100 million higher EBITDA as you move from 2012 to 2013. And the pie graph on the upper right really just shows pipeline receipts by commodity. And as you can see almost half crude and half pretty evenly split between crude and products, and the crude proportion has been going up as we handle more pipeline receipts of crude oil in the Eagle Ford shale.
Today we completed six growth projects, internal growth projects and also we did the acquisition I’ve mentioned in December in the Eagle Ford shale region, and as you see here an itemization of the six projects, reactivating a previously idle products line, reversing another line we had from Corpus to Three Rivers building a new 12-inch with Valero connecting a big pipeline we had between Corp and it used to run crude oil up from Corpus to Three Rivers and reversing that and we connected it to a 12-inch TexStar crude oil pipeline system. We built the new terminal at a breakout point called Oakville, and then we have a Pawnee terminal that we built and a pipeline connection we build for ConocoPhillips in the Eagle Ford. So those are our recent Eagle Ford projects.
And one thing you can see from this is that, what we’ve done is a combination of reactivating previously idle assets that were already there so it gave us a running start to be in this business ahead of our competition, and also a low cost answer for our customers that our competition couldn’t readily provide with Grassroots projects. Now we also repurposed some of these pipelines, we reversed their flow; we did whatever we needed to do to be a leader in this business.
Our total internal growth capital spent to date on this is about $180 million which is expected to generate EBITDA of around $35 million to $45 million per year. Last December we bought 140 miles of crude oil transition and gathering lines at five storage terminals that was the $325 million I mentioned. That provides incremental EBITDA in ’13, but really it kicks up in ’15 after we do the investments required to get to $50 million to $70 million by 2015, an additional $40 million of capital spending is required in connection with that $325 million acquisition to get to that level. So you can see it's quite an accretive acquisition that it's something around a six times multiple all totaled by the time it's up and running fully in ’15.
Dock expansion at Corpus Christi is critical for us to de-bottleneck our system to capture all of the upside growth we see in South Texas through the Eagle Ford, and that project is actually coming in early ahead of when we thought it would in April and on or ahead of budget. And as I said that de-bottlenecks the system. It removes the constraints at North Beach that currently limits our Eagle Ford crude oil pipeline system. The project is going very well. As I said it's ahead of schedule. The dredging has been completed, the construction of the dock’s are in progress. Somewhere early in second quarter we should be done with it and the capital cost for that will be around $40 million, and that’s part of the economic return we’ll capture on the entire Eagle Ford system.
South Texas crude oil pipeline system project really just talks about our upgrades now, two segments of our South Texas crude oil pipeline system. Those upgrades are happening in two phases. The first phase which has already been signed up and committed by shippers at 35,000 barrels a day, that first phase adds that incremental throughput capacity of 35,000 a day and will be available for service in the third quarter of ’14. That’s pretty low capital cost in a range of $40 million to $50 million with expected annual EBITDA of $20 million. So you can see that’s an extremely high return project.
The second phase adds an incremental of 65,000 barrels per day that should be available for service in the first quarter of ’15. We have marketed a portion of that 65,000 barrel a day capacity since we just got the project approved in late November by the board and we expect to fill up the 65,000 a day. But more capital is required for this phase, $125 million to $130 million with an EBITDA of around $40 million, there’s a little lower return in Phase I but you can see combined it's really quite a healthy return on investment for Phase I and Phase II of our Eagle Ford system. What we’re projecting is, NuStar will expand close to $800 million on Eagle Ford share related internal growth projects and acquisitions after the completion of the second phase of this project. So that’s why we’re driving our incremental EBITDA and up into that, so $130 plus million dollar range by 2015.
Reactivation of an idle 12-inch line, that’s the Mont Belvieu to Corpus Christi area project that we talked about on the last earnings call. I said that we have signed up a, we have a committed shipper for majority of the capacity on this previously idle products pipeline. So we’ve done the letter of intent. We’re very near to finishing off the definitive agreement with them and expect to announce it before Christmas the details of that agreement. While no volumes are actually planned to be shipped on the line to the second quarter of ’15, they’re going to pay us reservation fee payment starting in the second quarter of ’14. So those will be quarterly payment in the second, third and fourth quarters of ’14 that we’ll receive from this customer before they ship one barrel on the line.
Capital requires in the $130 million to $150 million range and just there a throughput commitment generates around $20 million or so of EBITDA, but of course now you have the rest of the line available too for additional throughput revenue which we expect to get and which we’re marketing right now. That line has a capacity of transport 110,000 barrels a day, most of it's been signed up but still there’s a substantial minority portion that’s not and we’re in discussions with other third parties to fill up that pipeline space that’s not utilized by the anchor shipper. So this will transform an asset previously producing nothing for the last couple of years into a very good investment, a long-term investment for the company, because this will be a 10 year deal.
And this is a map which depicts NuStar’s current Eagle Ford presence. You can see the three zones here that are often shown in Eagle Ford maps with the top zone being more oily and you go through sort of a condensate region and get down to the dry gas region of the Eagle Ford. But as you can see, all these lines are NuStar pipeline’s which reverse the entire systems, west to east and north to south and can get people to the water at Corpus and that’s why we have the dock expansion going on at Corpus.
So this is why we have a major market share of the Eagle Ford liquids and we’ll continue to be growing it over the next several years. And this just shows that in a line graph the throughputs and the throughput capacity in the Eagle Ford and as some of our projects layer in. You see right now we’re at close to 200,000 barrels a day and we’ll get up to next year close to 300,000 barrels a day and we’ll be growing from there beyond ’14.
Just quick financial overview of the company; this is just the capital structure and you can look at this, it's kind of at your leisure at reference in the presentation, but we have $1.5 billion credit facility with a lot of availability under it as of September 30, more than billion dollars available. You see some of our notes and bonds shown here and a total cap of about $4.9 billion. This is kind of an interesting debt maturity profile. What you see is the company doesn’t have any debt maturities at all until 2017, so quite a lot of time until we get to that point where there’s a $286 million shown at 2017 maturity and then we have, you see the sub-notes sort of the light green or teal in 2018, those are callable in 2018. So we have the option to call those in and time will tell whether we in fact do that, but we’re sort of assuming we will.
The final maturity is in 2043, but we can call them in 2018. And our debt structure now, we’ve shifted, we’ve traditionally been more or less 50% fixed to floating and you can see we have gotten more fixed now 73% fixed, 27% floating in anticipation of future interest rate increases to hedge ourselves against that. So no imminent debt maturities and the Company is well financed and there’s ample capital available to it in the bank markets and in the bond markets. Internal gross spending should be in the $300 million to $375 million range in 2013 and ’14, and you see that here and probably 40% to 50% of that is going to be Eagle Ford spending. The rest is other pipeline and storage terminal projects.
So we’re reaffirming the guidance that we just recently gave in the fourth quarter, fourth quarter 2013 EBITDA and all three of our segments, pipeline, storage terminals and fuels marketing should be higher than it was in fourth quarter of ’12. You still have, we have an Asphalt JV our only connection to it in terms of financials is equity and a joint venture interest. That has -- that since they continue to lose money they don’t have a negative impact on fourth quarter earnings per unit, but it doesn’t affect distributable cash flow or our cash flow coverage at all. EPU is expected to be in the range of $0.20 to $0.30; DCF per LP unit in the range of $0.80 to $0.90 per unit, and both of which are higher than they were last year.
So again, we are nearly done with our transformation from mostly a fee-based pipeline terminal company with an Asphalt refining; marketing business and other refining and trading assets to 96% fee-based pipeline and terminal business, nearly 100% of our business is that. So we’re in much, much better shape than we’ve ever been, certainly much, much better shape than we were a couple of years ago I should say that we’ve really kind of returned to our roots as a pipeline of storage terminal MLP fee-based with a lot of emphasis at least in the next couple of years in the Eagle Ford bringing to fruition the projects I described and expanding our presence there.
And so, those are my prepared remarks. I know there’s a one-on-one session afterwards, but I would be happy to entertain any questions from the floor in the meantime. If not, I want to thank you very, very much for your attention …
Ross Payne - Wells Fargo Securities, LLC
I got one.
Okay. Go ahead sir.
Ross Payne - Wells Fargo Securities, LLC
You guys obviously just got out of your Venezuelan contract, I mean how much is that going to save the JV getting out of that.
Well, it's obviously a plus for the JV’s business, and right now they’re trying to rail as much Canadian heavy crude, Canadian bitumen they can in lieu of the Venezuelan heavy crude’s, and those are, I haven't checked it yet, but they’re probably in the $30 to $40 discount to WTI instead of with the Venezuelan’s you’re probably a few dollars discounted WTI. So it's a very substantial up tick. However keep in mind, that the business is nonetheless loosing a lot of money.
So I think you have to think of this more in terms of without the Venezuelan contract they’re going to lose a lot less money. It's not as if they it certainly turns into a highly profitable business because of that, but definitely with improved results. Nonetheless even if the outlook was very, very bullish for the turn in that business, NuStar is going to get out of it. It's not strategic to us. At some point they’re going to want more capital invested in that business, it could be for any number of things maybe to improve the refinery desulphurization at Paulsboro or what have you.
We have no intentions of putting additional capital into that business, because we have ample fee-based opportunities as opposed to those being margin based opportunities to put that capital. So, it will help, but not enough to entice us to want to reverse course and stay in that business.
Ross Payne - Wells Fargo Securities, LLC
And Valero is obviously launching their own MLP; what kind of impact do you think that might have on NuStar?
Well fortunately for us, obviously we’re very close to Valero. We just wrapped up that bulk of the revenue that we derived from Valero in long-term 10 year contracts. They just renewed for 10 years the crude storage tank farms at three big refineries of theirs with us. They just renewed for 10 years also the crude and product pipelines in and around the Panhandle system in Texas and Oklahoma. We have other deals with them. There are term deals as well. So really it will not negatively impact NuStar’s revenue because we just signed up the large majority of it for a very long-term. But I think obviously now they have their own MLP.
Our portion of business we do with Valero is being declining significantly ever since we separate from Valero in 2006. They’re still an extremely important customer to us, very valuable to us, very important to us. And I was just actually talking to their COO and CEO about this the other day and they do what’s best for Valero just like any other management team does. If the best deal in particular geography to do is to do with NuStar, they’ll do with NuStar, if it isn’t they won't. They’re going to do what's in the best interest of the shareholders.
Ross Payne - Wells Fargo Securities, LLC
And what percentage of your business is with Valero? Either on the revenue line or earnings loss?
Right. Revenue wise it maybe 15% or so now. I can’t remember exactly on our earning system. That’s 15% to 20% range, but as you know as early as 2004, ’05 that was -- maybe 99%. So it’s a quite lot lower.
Ross Payne - Wells Fargo Securities, LLC
By the similar number on operating income?
Operating income will be a little higher. I just don’t have it handy, it will be a little high and that’s what we’ve wrapped up in these long-term deals. Any other questions? Okay thank you all very much and happy holidays if I don’t see you.
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