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Summary

  • The sale of the asphalt business has been a right decision for NuStar and its investors.
  • The Pipeline and Storage segments create a value for the partnership.
  • In 2013 these segments created much more value than in 2012 – in the first quarter 2014 this trend is keeping up.

In my last article on NuStar Energy L.P. (NYSE:NS) my main thesis was that the exiting the asphalt business was a good decision taken by the partnership's management. To prove it, I focused on three NuStar's main business segments: storage, transportation and fuels marketing (then called asphalt and fuels marketing). In my analysis I counted the economic value of each segment and came to the conclusion that the asphalt segment was weighing down the whole partnership.

Today I would like to reassess the economic side of NuStar's segments after exiting the asphalt business.

Firstly, one remark. On February 27, 2014, NuStar announced that it sold the remaining 50% ownership interest in NuStar Asphalt LLC. In this way the partnership is nearly entirely out of this business. I am writing "nearly" because NuStar is still financing its former business through $190 million loan and $150 million of credit support (guarantees, letters of credit etc.). All these credit instruments are supposed to expire on September 28, 2019.

After exiting the asphalt segment the partnership may focus entirely on the businesses it understands very well. To remind you, NuStar has three business lines:

  1. Pipeline - the partnership owns common carrier refined product pipelines covering approximately 5,463 miles, a 2,000 mile anhydrous ammonia pipeline and 1,180 miles of crude oil pipelines plus approximately 10.0 million barrels of storage located along the partnership's pipelines.
  2. Storage - NuStar owns terminals and storage facilities in the United States, Canada, Mexico, the Netherlands, the United Kingdom and Turkey providing approximately 84.0 million barrels of storage capacity.
  3. Fuels marketing - the partnership purchases crude oil and refined petroleum products for resale.

In its financial reports NuStar provides investors with the detailed information on many economic aspects of its business segments. Thanks to that it is possible to assess each business segment. My proposal is to find the so-called economic income generated by each segment. After that one can find out where the economic value is created and which segments are the best ones. But, please, note that an economic income does not have anything to do with a business valuation due to a simple fact - the stock market valuation has no impact on an economic income; an economic income is just an accounting measure.

So, how is this economic income calculated (mathematics haters may skip this section)?

Methodology

Simply put, an economic income is calculated taking into account the theoretical costs of equity and the real costs of debt (quite opposite to the standard accounting where only debt expense is included). It means that if one knows the following measures:

  1. EBITDA (earnings before interest, taxes, depreciation and amortization) generated by the segment
  2. value of the assets utilized by the segment
  3. segment's financing costs

one can establish whether the segment creates an economic value or it does not.

Now, let me put the numbers taking "Pipeline segment" as an example.

  1. Operating results of the segment

NuStar reports the basic elements of profit and loss account for Pipeline segment:

Thousands of dollars

Pipeline segment

2013

1

revenues

411,529

2

operating expenses

134,365

3

Depreciation and amortization expense

68,871

4

operating income (1 minus 2 minus 3)

208,293

5

EBITDA (4 plus 3)

277,164

  1. At the end of 2013 the assets utilized by the Pipeline segment were standing at $1,797,698 thousand
  2. Segment's financing costs are calculated through the formula: NuStar costs of capital (%) / assets utilized by the segment; NuStar cost of capital is a weighted average consisting of the cost of debt (calculated for each period) and the cost of equity (standing at 9.74%, as in my last article on NuStar). In 2013 the NuStar's cost of capital was 6.94%, which means that the Pipeline segment's financing costs were $124,726 thousand (6.9381% x $1,797,698 thousand)

Now, when we have calculated EBITDA and the segment's financing costs it is possible to calculate the economic income through the formula: economic income = EBITDA - segment's financing costs. In the case of the Pipeline segment, in 2013 the economic income was $152,438 thousand ($277,164 thousand - $124,726 thousand).

Positive economic income means that a business generates value. And vice versa.

Economic income of NuStar's business segments.

Now I can put all the data into one table to present the economic income generated by each business segment.

(click to enlarge)

As the table shows, since 2009 the Pipeline segment has been the best NuStar's business line. Until 2013 it has been generating around $100 million of the economic income each year. The second-rank segment is "Storage", generating about 50% less of the economic income than the Pipeline segment. The worst segment is "Fuels marketing" - this business line has been destroying the economic value of the company (most of the time the segment has been generating the economic loss). The decision to exit the asphalt business was definitely right and now the positive results of that step can be seen (in the first quarter 2014 the segment generated only a small economic loss).

But the most impressive thing happened in 2013. This year the economic income generated by "Pipeline" was higher by around 64% than in 2012. The table below evidences the throughput generated by this segment:

(click to enlarge)

As can be spotted in the table above, since 2011 the throughput, measured by the average amount of barrels transported daily by the company's pipeline system has been growing rather steadily through the years. In 2013 the throughput was just 1% higher than in 2012 so this tiny growth is not responsible for the excellent segment's results. So let us look at the revenues reported by the Pipeline segment:

Thousands of dollars

1Q 2014

2013

2012

2011

2010

revenues

102,959

411,529

340,455

311,449

315,690

As the table evidences, the revenues in 2013 were 20.9% higher than in 2012. The main reason for this increase is higher tariffs attributed to crude oil pipeline, gathering and storage assets in the Eagle Ford Shale region; these assets were acquired at the end of 2012 from TexStar Midstream Services LP for approximately $325 million; these higher than average tariffs plus the July 1, 2013 FERC tariff adjustment increased the overall tariffs charged by NuStar

What is more, the Pipeline segment's share in NuStar's revenues in 2013 is higher than in 2012, which is a positive factor - growing share of the most profitable segment. In 2013 this share was 44% (in 2012 it was 39.6%).

In the first quarter 2014 both segments (Pipeline and Storage) were still creating a relevant value for the partnership.

One simple digression

In 2013 the Fuels Marketing segment generated the economic loss; in the first quarter 2014 the economic income was nearly negligible. It seems that this segment is weighing the partnership down and even the exiting the asphalt business is not going to change this situation. Therefore, in my opinion, it seems to be reasonable to consider exiting this segment entirely.

Conclusion

Exiting the asphalt business was a milestone event for the partnership because NuStar has withdrawn from the value destroying business. Now the management is able to focus on the value creating segments - Pipeline and Storage. These businesses create a relevant value for the partnership and year 2013 was the best example of this.

Source: NuStar Energy L.P. Creates More Value To Its Investors