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Summary

  • The strategy to shed non-productive assets will result in higher operating income and cash flows.
  • The pipelines segment continues to show strong growth and new agreement should add to the growth.
  • As a result of increased cash flows and decreased operating losses; we might see an increase in cash distributions.

NuStar Energy (NYSE:NS) is an American oil pipeline company engaged in the terminaling and storage of petroleum products. The partnership operates in three major business segments of storage, transportation, and asphalt and fuels marketing. Over the last two years, the partnership has been sluggish with decreasing revenue pattern followed by losses. However, despite a fall in revenues and earnings, NuStar has made regular cash distributions to its shareholders over the last two years. In this article, we will discuss the distributable cash flows performance along with future growth prospects of the company.

Distributable Cash Flows & Cash Distributions

Distributable cash flows are extremely important for any partnership as a good cushion can allow the partnership to grow its cash distributions for the foreseeable future. NuStar has recorded decent growth in its distributable cash flows over the last few years. The partnership has grown its distributable cash flows by over 4.5% during the last year. However, the cash distributions of the partnership have remained steady at $4.38 per common unit since 2011. The partnership is currently divesting its non-productive assets. Also, the net income followed a downtrend which is mainly due to the goodwill and other asset impairment charges in the last two years.

The fuels marketing segment of the partnership has been under-performing for the last two years. NuStar recorded a decrease in its sales of fuels marketing segment of around 50% during the last year. This is due to the divestment of its Asphalt JV business division that used to purchase crude oil and refine petroleum products for resale. Also, the reduced demand for bunker fuels and increased competition in the Caribbean and U.S. Gulf Coast has negatively impacted the sales prices which resulted in lower net margins. However, these decreases were partially offset by the increase from fuel oil trading attributable to lower costs that outweighed falling sales prices compared to the same period last year.

Moreover, the cash flow from operations increased by 62% in the last year, mainly due to the considerable increase in the services revenue of the partnership. The capital spending over the last year has also decreased by 16.5% and was primarily related to the projects in the Eagle Ford Shale region and projects at St. James, Louisiana Terminal.

Future Growth

As evident from the divestment activity taking place in the last two years, NuStar is trying to decrease the operating losses by trimming its asset base. During the last year, the partnership completed its divestment of Asphalt JV, fuels marketing division, which showed over 50% revenue shortfall in the same period. Moreover, the partnership embarked on a strategic redirection with focus on its core, fee-based businesses, and storage and pipelines businesses. NuStar also wanted to reduce the earnings volatility and working capital requirements stemming from the fuels marketing segment.

Recently, NuStar announced an agreement with Occidental Petroleum (NYSE:OXY) to transport natural gas liquids from Mont Belvieu to Corpus Christi. The pipeline was idle and it was previously used for refined products. However, the partnership has started work to re-activate it and convert its flow. The pipeline should be ready by the second quarter of the next year. After its completion, the pipeline is expected to generate approximately $23 million per year of incremental EBITDA for NuStar. This agreement will add more value to the pipeline segment of the partnership which reported considerable profits over the last year. NuStar reported strong growth in its pipelines segment showing an increase of approximately 21% compared to 2012. This increase in pipeline revenue is mainly due to the increased output from crude oil pipelines that serve Eagle Ford Shale production in South Texas, primarily resulting from TexStar Asset Acquisition. The partnership reported strong growth opportunities from its pipelines segment which is expected to increase its earnings for the current year. NuStar could also benefit from the pipeline expansion project to be completed in the second quarter of 2014 as well as the tariff increase on pipelines regulated by the Federal Energy Regularity Commission.

Conclusion

The performance of the partnership has been poor over the last two years, which has resulted in a substantial loss in the stock price. However, the current strategy of the partnership will generate value for the unit holders in the medium-long term. The pipelines segment is showing strong growth and the sale of non-productive assets is decreasing the operating losses of the partnership. We believe that the partnership is set to grow over the next 2-3 years and unit holders should see considerable movement in the stock price. Despite poor operating results, the partnership has maintained its cash distribution - with increased cash flows from the new agreements and lower operating losses, we might see an increase in the cash distributions soon.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. IAEResearch is not a registered investment advisor or broker/dealer. This article was written by an analyst at IAEResearch and represents his/her personal opinion about the companies mentioned in the article. The article is for informational purposes only and it should not be taken as an investment advice. Investors are encouraged to conduct their own due diligence before making an investment decision. I am not receiving any compensation (other than from Seeking Alpha) for this article, and have no relationship with the companies mentioned in the article.

Source: Is NuStar Energy A Good Investment?