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NuStar Energy L.P. (NYSE:NS)

Q1 2012 Earnings Call

April 25, 2012 10:30 am ET

Executives

Curt Anastasio - CEO and President of NuStar Energy L.P. and NuStar GP Holdings, LLC.

Steve Blank - CFO

Paul Brattlof - SVP Marketing

Mike Stone - Head of Asphalt Marketing

Analysts

Brian Zarahn - Barclays

Darren Horowitz - Raymond James

Mark Reichman - Simmons

John Tysseland - Citigroup

Michael Blum - Wells Fargo

James Jampel - HITE

Selman Ekyol - Stifel Nicolaus

Operator

Good morning. My name is Kimberley and I will be your conference operator today. At this time, I would like to welcome everyone to the NuStar Energy L.P. and to NuStar GP Holdings LLC First Quarter 2012 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions) Thank you.

I would now like to turn the call over to Mr. Chris Russell. Please go ahead, sir.

Chris Russell

Good morning everyone and welcome to our conference call to discuss NuStar Energy L.P. and NuStar GP Holdings LLC First Quarter 2012 Earnings Results. With me today is Curt Anastasio, CEO and President of NuStar Energy L.P. and NuStar GP Holdings, LLC, Steve Blank, our CFO and other members of our management team.

Before we get started we would like to remind you that during the course of this call NuStar management will make statements about our current views concerning the future performance of NuStar that are forward-looking statements within the meaning of the Federal Securities Laws. These statements are subject to the various uncertainties and assumptions described in our filings with the Securities and Exchange Commission and will not be updated to conform to actual results or revised expectations.

During the course of this call, we will also make reference to certain non-GAAP financial measures. Our non-GAAP financial measures should not be considered as alternative to GAAP measures. Reconciliation of these non-GAAP financial measures to US GAAP maybe found either in our earnings press release or on our website.

Now, let me turn the call over to Curt.

Curt Anastasio

Good morning and thanks for joining us on the call this morning. During the firsts quarter NuStar Storage and Transportation segment results continued to benefit from the capital we invested in internal growth projects over the last couple of years, while our Asphalt and Fuels Marketing segment went in fact a negatively on ongoing weak asphalt demand, high crude oil cost and hedging losses.

For the quarter, NuStar Energy generated $97 million of EBITDA which was higher than the $93 million earned in the first quarter of 2011.

Our Storage segment earned a record $79 million of EBITDA, $10 million higher than the first quarter of 2011. The third quarter 2011 completion of the 3.2 million barrel storage expansion project at our St, James, Louisiana terminal as well as higher storage rates on new and existing storage contracts, all had positive impacts on the segment's EBITDA.

Pipeline transportation segment EBITDA of $50 million was higher than the $47 million earned in the first quarter of 2011. Higher pipeline revenues as a result of the 6.9% July 1, 2011 tariff adjustment and additional EBITDA generated by the Eagle Ford shale projects completed for Koch pipeline and Valero Energy in the second and third quarters of 2011 were the main drivers for the increase in EBITDA.

Throughputs on our pipelines were down about 2% compared to the first quarter of 2011. Competitive supply economics and reduced charge rates at some of our customer's refinery as a result of lower refining margins and gasoline demands were the main reasons for the reduced throughputs. However, crude oil movements on a reactivated idle pipeline that was placed in service in late June of 2011 are being shipped by Koch under a capacity lease agreement. Those lines are not included in our reported throughput volumes. If those lines have been included total throughput volume for the quarter would have been higher than last year's.

The Asphalt and Fuels Marketing segment generated a loss of $9 million of EBITDA during the quarter; $14 million lower than the $5 million of EBITDA earned in the first quarter of last year. The asphalt portion of that segment lost $16 million in EBITDA during the quarter compared to a $9 million loss last year. The first quarter is seasonally a weak quarter for asphalt, but continued weak demand for asphalt caused first quarter sales volumes to be lower than last year putting additional downward pressure on results.

Fuels marketing operations EBITDA increased to $16 million, $2 million higher than the $14 million generated in the same quarter of last year. Increased EBITDA in our crude oil trading operation more than offset reduced EBITDA in our bunkering and heavy fuels businesses.

Our crude trading operations benefited from the wide LLS WTI spread that existed during the quarter, while our bunkering and heavy fuel oil business margins were negatively impacted by hedging losses due to product location differential.

Our San Antonio refinery purchased in April of last year lost $9 million of EBITDA during the quarter, largely as a result of hedging losses and increased crude cost during the quarter. Excluding the hedging losses, the refinery made $2.5 million of EBITDA during the quarter. Increased industry demand for our lower cost Eagle Ford crude has driven up the cost of crude for the San Antonio refinery causing our refining margins to be lower than anticipated.

In addition, increasing crack spreads since we entered into some gasoline hedges in the second quarter of 2011 caused us to incur $11.8 million in losses on the hedges during the first quarter.

Taking a look at our corporate expenses, GNA expenses were at $27 million, $1 million higher than last year mainly due to higher stock-based compensation expense. Interest expense for the quarter was $22 million, up $2 million from last year. Increased debt levels required to fund internal growth program and reduced benefits from fixed to floating interest rate swaps were the main reasons for the increase.

With regard to our first quarter distribution, NuStar Energy's Board of Directors declared the distribution of a $1.95 per unit. The distribution will be paid on May 11, 2012. Distributable cash flow available to Limited Partners covered the distribution to the Limited by 0.55 times. The Board of Directors of NuStar GP Holdings declared a third quarter distribution of $0.51 per unit. The GP Holdings distribution will be paid on May 15, 2012.

As we move into the second quarter, the storage segment should begin to benefit from the recently completed unit trade off loading facility project at out St. James terminal. That facility constructed jointly with EOG resources offloaded the first 70,000 barrels per day unit train about 10 days ago. Second quarter results in storage should be higher than the second quarter of 2011 though lower than the first quarter of 2012. Seasonally high maintenance expansion tempered the positive impacts from the rail car offloading operation.

Transportation segment result should be negatively impacted by a 45 day second quarter turnaround at one of our customer's refineries. Reduced throughputs as a result of the turnaround should cause EBITDA for that segment to be lower than the same quarter of last year.

Results in our asphalt and fuels marketing segment are expected to be lower than the second quarter of 2011, but higher than the just completed first quarter. Asphalt to begin to generate positive result in the quarter as we move further into this trading season. The operation should also start to benefit from around 20,000 barrels per day of lower cost Brazilian and Canadian crude oils that we begin -- we plan to run during the quarter.

While EBITDA should be positive for the quarter, results are expected to be lower than the second quarter last year.

The recent completion of a new 12 mile 8-inch pipeline that was constructed from our crude oil storage tanks in Elmendorf, Texas located southeast of San Antonio to our Antonio refinery should reduce refinery unplanned outages and increase refinery runs by improving the consistency of the crude oil quality supply to the refinery. However, continuing high crude oil cost and projected hedging losses should more than offset any savings realized by the new pipeline causing second quarter results to be lower than same quarter of last year. EBITDA on the fuels marketing portion of the asphalt and fuels marketing segment should be comparable to the last year second quarter.

Second quarter 2012 G&A expenses are expected to be in the range of $28 million to $29 million, depreciation and amortization expense around $44 million to $45 million, and interest expense $23 million to $24 million. In the last half of the year, we expect the results in all three of our segment to be higher than the first half of the year.

Storage should continue to benefit from the Rail Car off Loading Project and the Storage Expansion Project that are St. James, Louisiana terminal. In addition, the fourth quarter completion of a 1 million Barrel Storage Expansion Project at our St. Eustatius Terminal should benefit that segment. However, pipeline transportation segment should benefit from an 8% to 9% July 1, 2012 tariff adjustment, as well as, additional EBITDA generated by our Eagle Ford Shale Project with TexStar Midstream and Valero that are expected to be completed in the third and fourth quarters of this year.

Improved margins as a result of running additional lower cost Brazilian and Canadian crude and increased sales volumes should lead to higher second half results in asphalt. Improved crack spreads and higher margins should also lead to better result in our St. Antonio Refinery and Fuels Marketing Operation. We have been evaluating our existing hedging strategy for the asphalt and fuels marketing segment. We have begun to implement strategies that should maximize the value of the remaining hedges.

For the full year 2012, we expect NuStar's EBITDA to be higher than it was in 2011. Storage segment EBITDA should increase by $30 million to $40 million. Our transportation segment is projected to be $15 million to $25 million higher. And EBITDA and asphalt and fuels marketing is projected to be higher than the $108 million earned in 2011.

Reliability capital spending for 2012 should be $50 million to $55 million, while our strategic capital should be in the range of $400 million to $450 million.

We continue to pursue and identify new strategic growth projects that are not included in our current strategic capital spending guidance, as well as acquisition opportunities as they arise.

On the pipeline transportation side of our business what we are pursuing is addition of strategic growth in the Eagle Ford shale and other shale areas where our pipelines are located. In the storage segment, we're pursuing growth opportunities in the Caribbean and at our St. James, Louisiana terminal.

These projects could add an incremental 40,000 barrels per day of throughput though our pipeline transportation segment over the next three to four years. We are going to provide you with more details on these projects in the near future as they develop.

Based on out current slate of strategic growth projects and the new projects we're pursuing, I'm more excited than ever about the EBIDTA and distribution growth opportunities for NuStar over the next few years.

So at this time, let me turn it over to operator so we can open up this call for Q&A.

Question-and-Answer Session

(Operator Instructions). Your first question comes from the line of Brian Zarahn of Barclays.

Brian Zarahn - Barclays

Curt, can you give us an update on the potential of pretty large expansion project you're considering at St. Eustatius and you know preliminary discussions with customers?

Curt Anastasio

There's a lot of customer interest. We're still evaluating what the proper project is for us. So as that customer interest gets more and more sharply defined we’ll figure out more precisely what exactly we can do in St. Eustatius and elsewhere in the Caribbean. But we're still actively looking at what exactly we can do, but the interest level is high. Danny, do you want to supplement it?

Danny

No, I think we talked about it before, but the Brazilian crude production comes on line here over the next couple of years is driving that interest. So as Curt mentioned we're just looking for the most efficient way to solve those customers needs and if it may be at St. Eustatius or elsewhere in the Caribbean.

Brian Zarahn - Barclays

Do you think a decision on St. Eustatius would take place this year?

Danny

Yes.

Curt Anastasio

Yeah.

Brian Zarahn - Barclays

And then on just little housekeeping. What was total CapEx in the first quarter?

Curt Anastasio

Hold on for a second while I'll get CAP for you. It was $100 million.

Brian Zarahn - Barclays

Okay, and then finally on distribution, the second half is also looking, look better. Is your thought process still indicating potentially higher growth rate in 2012 versus 2011?

Steve Blank

Well we'll say the same thing we said on the call for the annual results which is we budgeted one and what we will do will largely depend upon performance of the business, specially in the asphalt and fuels marketing segment in the second half of the year.

Operator

Your next question comes from the line of Darren Horowitz of Raymond James.

Darren Horowitz - Raymond James

Curt, I was wondering if you could spend a little bit more time talking to us about how you plan to maximize the value of hedges within you know the fuels marketing business? Just you know any additional color would be helpful.

Curt Anastasio

Okay I've got Paul here. Paul Brattlof is responsible for the hedging program. Go ahead Paul.

Paul Brattlof

Yeah, some of the hedges that we're looking at is some of the out of much are out of year hedges we're looking at. We're looking at trying (inaudible). What we're looking at was really not working on these hedges is the crude side of the business. What's happening is a lot of the Eagle Ford crude is actually getting waterborne pricing. And so we're looking at how we're going to reset some of those hedges in a way.

Darren Horowitz - Raymond James

Okay. So it's not going to be a situation where you’d be looking to take you know increased or incremental commodity price risk. It's just a situation where you’d be looking at, am I correct in assuming the structure of how the hedges are set up?

Paul Brattlof

That’s correct and there might be some incremental timing there as we're getting out of some and getting in others, but as a whole I think it's probably correct.

Darren Horowitz - Raymond James

Okay, and then Curt, last question for me. I'm just trying a sense as to the benefit that you guys will experience on the asphalt side of the business, running the lower costs Brazilian and Canadian crudes relative to the hedge one that you're facing as it relates to physical paving demand. I mean I understand that your coming right down the sweet spot of what should be paving season really through September, but I'm just trying to get a sense as to how much of a low cost benefit it will actually materialize and offset incrementally lower demand. I mean is it a situation where you know you guys are kind tracking to do around $70 million or $80 million in EBIDTA in the upcoming second quarter or is it a situation where you know your tracking more of kind of where were in 2010?

Curt Anastasio

Well, yeah, we haven't put out a specific guidance for asphalt alone, but we expect it to be better than last year. And so, no, I wouldn’t say it’s the same as if we're tracking say in 2011. But the benefit on the crude side is primarily in the Western Canadian. This is the heavy bitumen that we've begun railing into Paulsboro, and we've even began doing it a little bit into Savanna. And that’s trading at very-very steep discounts compared to our Venezuelan alternative, and the Brazilian is a discount but a more smaller discount and that’s part of the profit optimize.

What we are trying to do in the asphalt is profit optimize by lowering our crude cost, by getting more flexible at our terminal so that we can buy more finished asphalt in more places where its more economic to do so and have greater ability to blend into fuel oil or switch to fuel oil when that's more economic. Though we are switching from a system where stick to always buying Venezuelan crude and running it to make an asphalt to one where we have a lot more flexibility in the system. And Paul, you want to comment a bit more on these the benefit of the Canadian and the Brazilian crude.

Paul Brattlof

Yeah. We are seeing strong incentives to bring Canadian barrels to our refineries on the east coast. And just like Curt said, what that does it gives us flexibility to take the asphalt. When the asphalt premiums are strong and if they're weak then take it to some of our other markets. So, it gives us flexibility to optimize and we're having the best price.

Darren Horowitz - Raymond James

Okay. I appreciate.

Unidentified Company Speaker

Darren, I'd also add, last year in the second quarter we made $40 million of EBITDA on asphalt that we just Curt in this comments, just had said we were not we are not expecting to make as much as that in this year's second quarter. But for the year we expect to make more than the $28 million we made which was our worst year ever in asphalt last year than $28 million. So, we are expecting a pretty decent recovery starting in the second but in the third and fourth as we bring more of these crude into the planned, we are actually forecasting profits even in the fourth quarter in our current forecast, where last year we had a pretty sizable loss in the fourth quarter in asphalt, okay.

Operator

Your next question comes from the line of Mark Reichman of Simmons.

Mark Reichman - Simmons

Thank you. Many of my questions have been answered. But just it look like maintenance CapEx and your strategic CapEx had step a little bit versus last quarter's guidance not significantly, but what do you attribute that too?

Curt Anastasio

On maintenance CapEx, I don't think there is anything particular just a timing of one (inaudible). On strategic, we have come up with a few more investment projects. Yeah. I mean overall our strategic --

Mark Reichman - Simmons

Are those in the Eagle Ford? There is Eagle Ford Projects?

Curt Anastasio

There is storage and pipelines. I mean just a kind of because you are asking about strategic capital. The strategic focus of this company is Eagle Ford and other Shell place and pipelines. Saint James and Caribbean is our leading storage opportunities. We have some others but those are the ones who really had been the biggest bank for our buck. And trying to profit optimized the risk to what we have including asphalt, but our strategic growth is in the pipelines and the terminals. And it’s very significant especially with these oil shale plays.

So I mean, that’s where you’re going to see from us over the next few months, more announcements on this and over the next few years. It’s a big, big opportunity for the company and I just wanted to take that opportunity by strategic capital to emphasize that point.

Steve Blank

First is the budget which is probably what we were using when we spoke late January or that was early February earnings conference call for the year where again this budget by about $55 million on strategic okay and it’s again the things that Curt was just talking about and it could go up further as we sign additional contracts again on the storage and the pipeline side.

Mark Reichman - Simmons

Sure. And on the asphalt side, it sounds like the benefit of the lower cost crudes will really have an impact on the third quarter but the demand was exceptionally weak this quarter even though the first and the fourth quarters are typically seasonally weak to begin with. What do you expect in terms of pick up in demand? And what -- could you maybe provide just a little more detail around those lower cost Canadian crudes, whether that -- what type of contract you might have entered into or how long lived, that benefit will be or what the impact might have been on gross margin?

Curt Anastasio

On the demand I don’t know if Mike Stone, Head of Asphalt Marketing wants to address, we are exceptionally weak than first quarter in what you see, what happened there, how it’s going to evolve?

Mike Stone

We’re hearing from the customer base out too, but it’s demand overall for the year will be we’ll have to make it down 5%, but what we are also seeing is an increasing demand on our export segment. There is a lot of activity happening in Brazil, in Chile, Central America, and things seem to open up over in Western Europe as well, so we're getting some positive note on that.

Curt Anastasio

Paul, do you want to talk about the crude? Just to clarify, on the Canadian crude, we don’t have term contracts. We do on the Brazilian, we do on the Venezuelan but we’re locking up more and more supplies but Paul, you want to comment on that?

Paul Brattlof

Yeah. We’re buying everything in a fixed spot. We have a couple of deals that are three or four months out but is all pricing relative to (inaudible) and what we have made some commitments we’ve gone out and increased our rail car fleet which shows that we are going to be in that business and we are ramping it up all year, and its just gradually growing all year. So it’s going to materially affect our crude cost (inaudible).

Mark Reichman - Simmons

Great, thank you. And then just lastly, in terms of what are you budgeting in terms of the tariff adjustment in July?

Curt Anastasio

I had it in my remarks as an 8.

Steve Blank

Mark, it's between 8% and 9%.

Operator

Your next question comes from the line of John Tysseland of Citigroup.

John Tysseland - Citigroup

Just on St. Eustatius, is there capacity currently available for long term firm agreements there at that terminal?

Unidentified Company Speaker

No, none.

John Tysseland - Citigroup

And then what is the -- can you just kind of update us on what the contract life is there? I know you have a $50 million project that’s coming online I think in the fourth quarter. Can you (inaudible) that help lengthen your contract life? What is that -- what does that look like?

Curt Anastasio

Yeah that would -- the billion barrel is backed by, I believe, it’s a five year contract. Most of, I think, our earliest contract coming up there is the end of 2013. Everything else is out beyond that.

John Tysseland - Citigroup

And then how has demand been Ford, island terminal what's island terminals and then kind of what's your outlook? Is that -- you obviously put St. James as kind of a more of a priority. Is that there is a shift in the fundamentals at from island storage to more of Gulf Coast storage or is that because Gulf Coast storage is so booming right now?

Danny

Well, St. James has become really a hub for crude oil with the changes in all of these product test from WTI to LLS and the way the crude is flowing but we haven’t turned our focus away from the island terminals. In fact, St. Eustatius is just right in the middle of the fairway to catch some of this Brazilian crude coming out of those new fields offshore Brazil.

Curt Anastasio

Yeah, I wouldn’t think of it in terms of island storage versus onshore storage. It's more, as Danny said, we happen to be at a hub location in St. James. When we bought it there was little under 3 million a few years ago, now its 8 going on 9 and it's headed to 12. And its because its in a great location with great connections. And St. Eustatius really is in a entirely different kettle of fish. Their prime driver has been, as Danny said, there's offshore Brazilian production which is ramping up over the next few years and we're in about the best possible location for trans-shipment and storage for them to various markets. So, we really have a location differential over the other island alternatives but that’s what a separate thing are driving the growth at these tow locations, so I would say.

Operator

Your next question comes from the line of Michael Blum of Wells Fargo.

Michael Blum - Wells Fargo

Hi, good morning guys. Two quick questions, one just clarification in terms of the hedging loss on the San Antonio refinery, are those non-cash mark to market losses you're talking about or those actually realized losses?

Curt Anastasio

Well go ahead Paul. Do you think its about half, half and half?

Paul Brattlof

Yes, its half and half roughly.

Michael Blum - Wells Fargo

Okay, and based on your current hedge book as it exists today, would you expect that to continue or your going to basically redo that hedge book that you were talking about avoid that?

Paul Brattlof

I think we’re still going to have some residual carry over in the second quarter --

Curt Anastasio

But its less.

Paul Brattlof

But its getting less and it will wind off by the end of the year.

Michael Blum - Wells Fargo

Okay, and then the second question just in your DCF calculation you have distributions from the joint venture. There was about $3 million last year, first quarter 2011. It was zero in the first quarter of 2012. Can you just about what changed there?

Steve Blank

Yeah, the lend in JV paid a double distribution in the fourth quarter of last year, just one very late at the end of the year. So that’s why there was none in this first quarter. That’s atypical.

Michael Blum - Wells Fargo

Okay and is that typically paid out ratably or is it lumpy like that?

Steve Blank

Yes, ratably.

Operator

Your next question comes from the line of James Jampel of HITE.

James Jampel - HITE

Hi, just two quick questions. On the Canadian crude moves to Paulsboro, is that an all rail move?

Curt Anastasio

Yes.

James Jampel - HITE

And do you use your own rail cars?

Curt Anastasio

Well we're not owned but leased, so they are committed to our service, yes.

James Jampel - HITE

I see, and the second question as you go forth with this strategic capital over the course of the year, do you see yourself maintaining the 50-50 debt equity mix?

Curt Anastasio

Yes.

Steve Blank

Yeah, what was debt to equity first quarter.

Curt Anastasio

It was 47 --

Unidentified Company Speaker

47.

Curt Anastasio

And in out lifetime it's been kind of like somewhere between 42 and 47.

Unidentified Company Speaker

So yes, the answer to that is yes.

Operator

Your next question comes from the line of Selman Ekyol of Stifel Nicolaus.

Selman Ekyol - Stifel Nicolaus

Thank you, good morning. Almost everything I got has been asked but in terms of on the transfer -- on the storage side you guys also referenced higher storage rates, I was wondering if you could given any more color around that in terms of what kind of increases you're seeing?

Curt Anastasio

Well, just in general we continue to see increases in our rates. We are fortunate to have some good locations that are like St. Eustatius and St. James that are growing and so there is fight for storage in those locations. As the contango market structure has disappeared and I think those that own terminals that have less of a fundamental reason to exist may not be experiencing that right now, but as I said we are sure storage of both St. James and St. Eustatius and talking about building more.

Selman Ekyol - Stifel Nicolaus

Okay. So we should expect storage rates to continue to have an upper bias in those areas?

Curt Anastasio

Yes.

Operator

(Operator instructions). Your next question comes from the line of Ross Payne of Wells Fargo.

Curt Anastasio

You're there, Ross? Hit a different button.

Operator

His question has been withdrawn. And at this time there are no further questions.

Chris Russell

Thank you, operator. And once again, I would like to thank everybody for joining us on a call today. If anybody has any questions please call NuStar Investor Relations. Thank You.

Operator

Ladies and gentlemen, this concludes today's conference. You many now disconnect.

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