NuStar Q3-2021: A Mixed Bag

Summary

• NuStar Energy L.P. reported what appeared to be strong third quarter results.
• The year-end debt to EBITDA was guided for under 4.0X.
• There were definite positives in the results, but we are still staying on the sidelines.
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When we last covered NuStar Energy L.P. (NYSE:NS), it was after their Q2-2021 results. We described the quarter as a strong one, but we noted that some risks were increasing. Our thoughts were that it was best to stick with NuStar's preferred shares (NYSE:NS.PA), (NYSE:NS.PB) and (NYSE:NS.PC). NuStar recently reported its third quarter results, and we look and see how our cautious stance is playing out.

Q3-2021

There were plenty of positives in this report. As noted right at the top of their earnings release, NuStar completed an asset sale and is now targeting a debt to EBITDA of under 4.0X by year end.

"In the third quarter, we completed the $250 million sale of our Eastern U.S. terminal facilities to Sunoco LP (SUN), which made it possible for us to execute on our plan to optimize our business and strengthen our balance sheet by deploying the sales proceeds to lower our leverage and focus 100 percent of our resources on our core asset footprint. As a result, we are now targeting a year-end debt metric below 4.0 times. We also continue to expect to self-fund all of our spending from our internally generated cash flows in 2021, 2022 and beyond," said NuStar President and CEO Brad Barron.

Source: NuStar Q3-2021 Press Release

Alongside that, NuStar noted the record volumes on its Permian pipelines which hit 502,000 barrels per day and were on track to achieve a 2021 exit rate of near 514,000 barrels per day. Distributable cash flow or DCF, was $92 million for Q3-2021, up from $84 million Q3-2020. This created another healthy quarter where the distribution coverage ratio was comfortably past 2.0X.

While we agree with the positive nature of those numbers, we want to break down what the company has not really focused on in the press release. Adjusted EBITDA, to start with, was down about $3.3 million from last year.

Source: NuStar Q3-2021 Press Release, highlights from author

Adjusted EBITDA has also been down year to date vs 2020 and that decline is actually slightly less on a percentage basis. What is driving this decline when we are seeing reports of some records being broken? We look at that next.

NuStar operates a pipeline segment and that is doing quite well as noted in the press release. You can see the expansion of margins in this segment as volumes picked up.

Source: NuStar Q3-2021 10-Q, highlights from author

Operating expenses leave out depreciation and present a clean view of cash flow change. Here, we can see the almost $16 million cash flow expansion year over year. The exact opposite happened in the storage segment, and we saw a $15.00 million decline in cash flow.

Source: NuStar Q3-2021 10-Q, highlights from author

Storage terminal revenues, which we had highlighted previously, continue to be stressed as overall crude and product inventories have tumbled. The markets continue to be an extreme state of backwardation (further out months cheaper than front end months).

Source: CME, highlights from author

This decreases incentives for storage and NuStar has been facing this impact for three straight quarters.

Another point we want to highlight here that while there have been some asset sales, NuStar has also spent close to $350 million in capex over the last two years. We see those two items as a wash, hence we cannot blame any declines solely on asset sales.

Outlook & Verdict

From a 50,000 feet view, does the company trajectory look like it is strong or does it look weak?

Source: NuStar Q3-2021 Press Release, highlights from author

Consolidated Debt to Consolidated EBITDA is at 4.1X and that comes after excluding NuStar Logistics, L.P. SB NT FX/FL 43 (NSS). The good part for NuStar is that this 4.1X number is a shade lower than last year (4.13X) despite the EBITDA decline. So we are seeing some marginal deleveraging. That is good from the bull perspective. NuStar has also benefitted in this timeframe with a strongly declining interest expense, and it will get even more benefit from its preferred shares resetting in the months ahead. NS.PA resets in a month and NS.PB and NS.PC reset in 2022. These factors make it hard to get overly bearish on the name.

Going forward though it remains to be seen how the volumes story offsets the storage woes. Weakness in storage can get far worse as contracts roll over and customers suddenly find that they have far more storage space competing for their dollars. On the other hand, while pipeline volumes can increase, we are not going to see significant pricing power as even there, capacity is more than sufficient. If NuStar can stabilize and grow its EBITDA, its next deleveraging target will likely be the non-publicly traded Series D in 2023. We remain neutral on the name and see better places to make money.

Please note that this is not financial advice. It may seem like it, sound like it, but surprisingly, it is not. Investors are expected to do their own due diligence and consult with a professional who knows their objectives and constraints.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.