The deal with Lindsay Goldberg LLC was sealed on September 28, which grants both NuStar Energy (NS) and Goldberg 50-50 voting rights in a joint venture. We view the latest development as favorable, and in light of the expected reduction in debt levels and reduced volatility in earnings, we recommend the high yielding master limited partnership (MLP) as a buy.
NuStar Energy is a master limited partnership that operates in the business of terminalling and storing of petroleum products, the transportation of petroleum products and anhydrous ammonia, and the refining and marketing of petroleum. The business is conducted through three segments: Storage, Transportation, and 50% voting rights in the asphalt and fuel marketing. The storage segment provides terminal and storage facilities that provide amongst other things storage, handling and other services for petroleum products, crude oil, specialty chemicals and other liquids. The transportation segment is in the business of transporting refined petroleum products, crude oil and anhydrous ammonia. The third segment of asphalt and fuel marketing consists of asphalt operation area, which holds two refineries with a capacity of 104,000 barrels per day. Another area within the segment is the fuel marketing one, which purchases crude oil and petroleum for resale. Also included in the segment is the San Antonio refinery, which refines crude oil with a capacity of 14,500 barrels per day.
The MLP reported a net loss of $246.8 million or net loss per unit of $3.56 for the second quarter of 2012, with the main culprit being the unprofitable asphalt and fuel marketing segment, which registered an operating loss of $292.5 million. The segment's loss was attributable to two things; $266.4 million asset impairment charge to long-lived assets, and a decline in gross margins, which decreased by $90.5 million in the second quarter. A weak economic outlook and the resulting fall in demand and margins for the segment had compelled the company to enter into an agreement with Lindsay Goldberg and create a joint venture to operate NS's asphalt refining assets. Lindsay is a private investment company that aims to partner with management and closely-held businesses. Both companies will have a 50% stake in the joint venture. The deal was closed on September 28, with the company collecting $270 million.
In a bid to move into more profitable businesses, NuStar will realign its focus on its terminal and pipeline operations, and seek to expand the segment; the company has added another rail unit train at its storage capacity in St.James, Louisiana. This shift in focus is derived from an urge to pursue strategic growth, as the company puts it. Lately, the MLP completed a third pipeline to move 250,000 barrels of light, sweet crude from Eagle Ford in southwest Texas to the port of Corpus Christi. Capital spending for 2013 is expected to exceed the initial projected figure of $425-$475 million.
In August 2012, Fitch downgraded NS's rating to BB+ amidst concerns of high leverage. It has a total debt-to-equity ratio of ~110%, with a quick ratio of 1.11x. With the closing of its deal with Goldberg, the sell-side estimates that it will allow for a reduction of some $400-$500 million of its debt balance. Furthermore, the proceeds from the deal are intended for corporate purposes, ranging from the repayment of outstanding borrowing from its revolving credit facility, and to pay for possible acquisitions and financing its working capital.
Since the operating resulting from the asphalt segment largely depended on the margin between the cost and the sales price of the products being offered, earnings were particularly exposed to changes in the level of commodity prices. With such an outlook, cash flows could not be predicted with much certainty, and the potential for distribution to limited partners was questioned. With the conclusion of the deal, the MLP will be able to reduce the inherent volatility in earnings, reduce its debt, as already mentioned, and focus more on the stable pipeline and terminal business.
Currently, the company yields an attractive yield of 8.52%.
Table 1: Competitors
Magellan Midstream Partners L.P. (MMP)
Kinder Morgan Energy Partners (KMP)
Spectra Energy Partners, LP (SEP)
Enterprise Products Partners (EPD)
Chart 1: Distribution History
The market expects a mean price target of $58. Estimates for earnings are $1.37 for 2012 and $2.68 for the year following it. In light of the recent strategic moves by the company, and an above average yield, we recommend the MLP as a buy.