NuStar Appears To Be Addressing Previous Complaints

About: NuStar Energy L.P. (NS)
by: Power Hedge

NuStar Energy was long positioned as a growth play off of the Permian, but its debt was a bit higher than I like to see.

The company has brought down its debt somewhat, although I would still prefer it to bring this down to increase its margin of safety.

The Permian basin has seen strong crude production growth over the past two years and is likely to continue to deliver growth.

NuStar will benefit as the volumes of crude moving through its pipeline system increase.

The company is also solidly positioned for the US's transformation into an energy-exporting nation.

On Wednesday, December 5, 2018, midstream and pipeline operator NuStar Energy (NS) gave a presentation at the Wells Fargo Securities 17th Annual Midstream and Utility Symposium. As is the usual case for presentations such as this, NuStar spent a considerable amount of time making an investment case for itself. However, it also provided an overview of the broader industry environment in which it operates, which can oftentimes be helpful when one is considering investing in this company or similar ones. I must admit that in my last article on NuStar Energy, there were a few items about the company that were concerning. Fortunately, we do see here that the company has begun to address these items, which helps to raise its appeal somewhat.

NuStar Energy is one of the few pipeline companies focused on crude oil pipelines. The company has approximately 9,700 miles of such pipelines spanning over much of the central United States.

Source: NuStar Energy

These pipelines are capable of moving approximately 1.5 million barrels of oil per day. While this may not seem like much, it is a sizable portion of the total production of the continental United States. As might be expected and as can be clearly seen above, a sizable portion of the company's operations are located in Texas, particularly in West Texas where the Permian basin is located.

The Permian basin has been at the center of much of the oil production growth that the United States has seen over the past two years. This makes sense when we consider that this is the second largest onshore oil field in the world (only Saudi Arabia's Ghawar is bigger). The field is currently producing approximately 3.5 million barrels of oil per day, and will likely have increased to around 3.6 million barrels by year-end. While we will probably see some slowdown in the region's production growth in the near-term due to a lack of takeaway capacity, this problem is expected to be solved within 12-18 months, as new pipelines come online, and this will allow the region to continue to increase its production.

Source: NuStar Energy

NuStar states in its presentation that the Permian is likely to be producing around 5.0 million barrels of crude per day by the end of 2020 and 8.0 to 10.0 million barrels per day by 2030. While I think that this may be rather optimistic, it does seem likely that we will see some growth in the region over the coming years. This seems true even if oil prices drop to as low as $50 per barrel (they are at $51.94 as of the time of writing) given current production costs.

Source: NuStar Energy

The reason that this is important to NuStar Energy is because of the way that the company earns its money. As is the case with all midstream firms, NuStar charges its customers a fee for each barrel of oil that they move through the company's pipeline network. Thus, rising production would result in a greater quantity of oil that needs to be moved. This should boost the number of oil barrels moving through NuStar's pipeline network, boosting the company's top-line revenues.

Of course, a pipeline network is only capable of carrying a finite amount of oil. Thus, production growth can only benefit NuStar to the point where it fills the company's infrastructure to its maximum capacity. In order to grow further, the company will need to construct additional pipelines. Fortunately, it is doing that as the company controls one of the largest intra-basin pipeline networks in the Permian. The basic point of this system is to transport the oil from the fields where it is extracted from the ground and ferry it to the major delivery and transport hubs in Midland, Colorado City, and Big Spring. NuStar has been expanding this system in response to the production growth, and since May, the company has added roughly 200 miles of new pipe and increased the number of well interconnections by 83 with another 26 ready to be added soon. The company also expanded the network so that it can service another 20,000 acres. Thus far, this has been enough to grow the system's capacity at a faster rate than the Permian has been growing its production. This has thus far allowed this system to grow its EBITDA at a fairly rapid rate:

Source: NuStar Energy

This pipeline is not NuStar Energy's only opportunity to profit off of growth in Permian oil production. NuStar also owns a dock facility in Corpus Christi that could quite easily become a major terminal for the future export of crude oil. The United States just recently became a net exporter of crude oil, which further lends support to this thesis, which was the natural result of the country's crude oil production in the Permian and other basins surpassing the nation's consumption of crude oil. NuStar's export facility is designed to receive oil from the Permian basin, store it on site (the facility can store 3.3 million barrels onsite), and load it onto tankers (up to four at once at a rate of 100,000 barrels of oil per hour each) bound for the rest of the world. The facility is also located right at the entrance to the main port, a location that allows the company's customers to save 4-6 hours over using a competing facility. This could provide a competitive advantage to NuStar Energy, and it seems likely that the facility will see growing usage as the United States continues to expand its presence as an oil exporter.

In an earlier report, I discussed that NuStar's debt load is quite a bit higher than I wanted to see. Fortunately, the company has addressed that problem somewhat. One of the more common metrics that we can use to evaluate an MLP's debt load is the debt-to-adjusted EBITDA ratio, which tells us how a company's debt load compares to its ability to generate money. As of September 30, 2018, NuStar's debt-to-EBITDA ratio stood at 4.5x, which is not bad as it is relatively in line with what other companies in the industry have. However, I generally prefer to see this ratio at less than 4.0x for an added margin of safety.

Overall, NuStar Energy looks as though it has some potential to take advantage of the growing production in the Permian basin. This could easily be one of the major energy stories over the next few years, particularly as the United States continues to grow as an oil exporting nation. NuStar also appears to have gotten its debt down to a reasonable level, even though it is still a bit high for my tastes. The company may be worth considering as an income play.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.