NuStar's Dividend Appears Stuck, But The Company Is Improving

Summary

• At a common share dividend of $1.60 per year, NuStar will likely be cash flow neutral during 2021.
• The company may produce a cash increase of $150 million during each of the years 2022 and 2023.
• If an increase in dividend occurs, it's likely to be minor.
• The health and independence of the company are improving.

Although the petroleum industry experienced an unprecedented challenge in 2020, NuStar Energy (NYSE:NS) met the challenge and its financial health also improved. With the company following financial practices similar to other energy MLPs, understanding a possible future expansion in dividends seems in order. The company transitioned last year from borrowing significant portions of its expansion capital to a mode of self-funding all cash requirements. Its plan also includes a meaningful reduction of its long-term debt. All of this affects available cash for dividends, capital, and expansion.

NuStar Energy was formed when Valero spun off its transportation business in 2006. Over the next 15 years, the company expanded its pipeline business and entered the Permian Basin in 2017 with the purchase of Navigator's Energy Services. One of its unique businesses has been the export of American-produced crude oil from its Corpus Christi terminal. Approximately, half of its business is the transportation of products and the other half is crude oil.

At its February conference, NuStar provided several valuable insights into its progress of the past year and offered investors a glimpse into its future. We included several slides in our review of NuStar.

2020 Financials

Our review starts with a summary of 2020's financial performance.

The above presentation slide summarizes last year with a couple of surprises. Even with a virus-induced downturn, it increased its adjusted EBITDA by 8% without impacting other key performances.

We noticed that NuStar, perhaps purposefully, excluded remarks on its distributable cash flow. But before, the company noted, "For 2020, we expect to generate sufficient cash from operations to fund our distribution requirements, reliability expenditures, and a portion of our strategic capital expenditures."

Some of the investor important expenditures are known. It pays common shareholders $1.60 in dividends on 110 million shares or $175 million. It also pays another $120 million to its preferred unitholders. NuStar spent $160 million in the capital.

Charting the Direction of the Oil Markets

Before continuing, a look forward to the future demand within the oil markets seems essential. Again, the company provided multiple slides to help. We also added a recent slide from the EIA report for petroleum products.

The first slide reviews 2020 performance during key periods with 2021 YTD.

After a collapse of the markets in April of last year, the markets returned to normal by October. Softness in February showed in three of the areas, likely induced by severe cold weather across much of the United States especially, in the Southwest.

The next slide from the EIA shows a broader view of the recovery since April.

At the bottom, product usage, YoY, remains stubbornly stuck at -10% primarily driven by a 35% reduction in jet fuel usage. It's not fully recovered, yet.

Next, NuStar provided the industry's prediction on usage going forward into 2021.

The prognosis for gasoline and diesel usage expects a return to 2019 levels by the end of this year. Jet fuel improves but stubbornly falls short of 2019.

We suspect that this last slide is on the optimistic side with jet fuel predicted at 70% in the 1st quarter. The actual was 65%. The other two predictions seem basically on target.

Looking Ahead into the Rest of 2021

The next slide summarizes NuStar's expectations for 2021.

The company expects to pay for all of its cash requirements with YoY similar EBITDA.

The next slide reveals projected refining utilization, an important consideration since NuStar transports both crude oil and products.

Projections expect refining to exit the year at similar performances to 2019.

The next slide provides a critical view of NuStar's physical structure. In 2017, the company acquired Navigator's Energy Services, LLC, exposure to the Permian Basin. Successfully implementing the acquisition placed strains on its capital spending budget.

Fortunately, most of the heavy capital lifting occurred before the major downturn last year. Capital spending can now be tweaked to enhance existing structures allowing NuStar to wisely limit this spending.

With capital expenditures still limited and EBITDA unchanged, our belief is that there is almost a zero chance that NuStar will increase its dividend this year. We also aren't expecting a cut.

Looking Past 2021

Management noted that cash flows for the first quarter will be lower than 2020, but expect the total year 2021 to be similar to 2020. We find this significant in that it opens the window into what can be expected heading into 2022 and beyond. A table included summaries of the 1st quarter 2020 result comparing YoY plus QoQ and how this might predict 2022 or beyond.

Quarterly Revenue	1st 2020	1st 2019	2nd 2019	3rd 2019
Revenue (Millions)	$393	$348	$372	$379
% Difference		13%	7%	2%

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It appears that in an equivalent year to the beginning of 2020, NuStar might generate north of $1.6 billion, a $100+ million increase. With constant costs, a fair assumption, cash generation would increase by the same amount or $120-$150 million. In the best light, NuStar's increased cash generation during the intermediate future appears tied up with paying down debt and increasing expansive capital. Prior to 2020, NuStar spent on additional capital alone, more than the $120-$150 million predicted increase.

For NuStar and other MLPs, dividend yield plays a primary role in determining the pricing. For this company, the market's view placed an 8-10% yield for the stock. The table shown next summarizes how the value of the stock might be influenced by the company choosing to raise the common share dividend. Each quarterly $0.10 increase costs $45 million a year. With a possible cash increase of $150 million in each of the next two years, the company could choose to spend some of it or all of it on the dividend.

Stock Price/Dividend	Case 1	Case 2	Case 3
Amount of Increase	$0.10	$0.20	$0.30
Change in Stock Price	$4-45	$4-$5	$4-$5
New Stock Price Range	$20-$25	$25-$30	$30-$35

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With company goals to lower its leverage ratio and possible increases in capital needs above the miserly level of today, we find it difficult for NuStar to use all of its possible free cash to increase the dividend. Perhaps investors might see a $0.10/quarter increase next year.

The Stock Chart

The next figure, generated using TradeStation software, is a weekly chart for the stock price.

The chart reveals an important pattern, higher lows with equaling highs. Normally this is quite bullish, but this time we aren't so sure. Our analysis places fundamental doubt that NuStar will raise its dividend during this year. Pricing above $20, places the yield under 8% traditionally an MLP low mark. We suspect that the stock price will trade between $15 and $21 or $22 for the foreseeable future.

A Summary and Always Remember the Risks

Our analysis looked at possible cash flows over the next couple of years. We believe that NuStar's revenue will grow. NuStar could add the additional $0.10 it cut last year at a cost of $45 million a year. If it does, the stock price trading range will likely jump from $15-$20 to $20-$25. But we are far less confident that any dividend increases are in the foreseeable future. It's important to note that the major change in financial management with many MLPs is now accepting responsibility for all expenses generated from operations, permanently changed stock price ranges. NuStar once generated enough cash to deliver a dollar per quarter in dividends, but in general, was borrowing capital for growth. Since the size of a dividend plays such an important role in stock price, we believe that at least until that changes, the stock price for most MLPs is range-bound at significantly lower prices. But for new money entering, these types of companies, including NuStar are still valuable investments.

No investment is without risk and risk for fossil fuel energy-related companies might have been elevated from more recent governmental policies. The administration exposed its intentions with respect to all types of fossil fuel companies. One analysis of the Fact Sheet released by the White House illustrates that even a campaign promise to upgrade natural gas infrastructure was left out, likely purposefully. And remember that energy usage is tied heavily to economic conditions, conditions that are ever-changing with the effects of a lingering virus. Still, we have accepted these risks and continue to own a sizable amount of NuStar.

We included more presentation slides in this article than is normal. NuStar is exceptional in communicating valuable information at its conferences. We encourage our readers to take the time to study these and the rest of the slides from its last conference. It is worth the time.

Analyst’s Disclosure: I am/we are long NS. 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.

We own a sizable position with short calls either at $20 or $22.5 covering most of the stock. We also actively trade NS.