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Trade Opportunity In NuStar Energy

|Includes: NuStar Energy L.P. (NS), NSH
Summary

Recently announced merger with general partner.

NuStar holdings currently offering discount to NuStar Energy.

Significantly improved financial picture for combined entity.

On February 8th NuStar Energy (NS) announced they were slashing their dividend from $4.38/yr to $2.40/yr. They also announced that they would merge in a share for share transaction with their general partner NuStar Holdings GP (NSH). This news, and recent volatility, has hammered the price of both issues, they have sold off about 25%. Both of these stocks have been on my radar for a while, and I think it is time to pull the trigger. I am buying NSH to establish a discounted position in NS.

NuStar Holdings (NSH) only source of income was NuStar Energy (NS). They also received IDRs which are being eliminated. Each share of NSH will be converted to .55 shares of NS. At first the deal seems dilutive to NSH but each new share will be bringing  $3.96/yr worth of distributions into the combined entity.

As of 2/15/2018 NSH is trading at $12.90/share, or 53.4% the price of NS current price of $24.15. Buying NSH right now is really buying NS at a 3% discount. 

The combined entity will be paying out around 385 million/year less in distributions. NS will be easily able to cover the new distributions of $2.40/yr, and intends to start increasing them as soon as 2019.

1.82 shares of NSH converts to 1 share of NS for a price of $23.46/share. It will be paying $2.40/yr in distributions for a yield of 10.23%. I am going to put in limit orders to buy on dips. Dividends are being paid today, and we are likely to see selling off after they are received. When the price is right, I am going long NSH. The price of both issues needs to be monitored to expose any discount.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in NSH over the next 72 hours.