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The Unknowns For NS Jump With Acquisition - I Withdraw My NS Suggestion.

|Includes: NuStar Energy L.P. (NS)

In my 4/10/17 article on EEP, I suggested NS as a better alternative. That suggestion did not last long (grin . . or maybe grimace).

What I posted in the EEP article:

I suggested NS and GEL as alternatives to EEP. Yesterday NS announced a $1.475 billion purchased of Navigator Energy Services - and the price is down due to the announced secondary offering needed to fund that purchase.

What follows is lightly informed speculation -- NS may have over prepped for good things coming from Eagle Ford - and constructed Corpus Christi assets for future Eagle Ford export. It is my perception that Eagle Ford is mostly producing assets that are not profitable with oil around $50. Drilling has slowed.

Fracking has made the old assets in the Permian Basin profitable at $50 oil. NS lacked Permian Basin assets. The Navigator Energy Service purchase gives NS Permian assets - which have become badly needed by NS due to economic problems with the Eagle Ford supply. Now (after the re-direction of the newly acquired Permian molecules) NS can more fully use the Corpus Christi assets that it already owns.

Thus the Navigator purchase could be made at a relatively high price -- not because the cash flow from Navigator assets alone justifies the price. But Navigator + the impact on the existing NS Corpus Christi assets (potentially) justifies the price.

At this time, NS has failed to produce pro forma EBITDA or DCF guidance that this purchase will add to their earnings. NuStar Energy L.P. announced today (4/12/17) the pricing of an offering of 12,500,000 common units for gross proceeds of approximately $579 million. There were 78.514 existing units at the end of Q4-16. That leaves a lot to be funded by debt plus potential more unit sales. The DCF/unit numbers in pre-acquisition Q2-17 are likely to be ugly.

BB+ rated NS had a weighted average cost of long term debt of 6.4% as of 12/31/16. That is relatively high. The cost of equity is going to be high.
Bottom line - while this acquisition may be a good thing long term for NS, the amount of unknowns has just short up. Thus I am no longer suggesting NS as an acceptable alternative.

The Q4-16 NS numbers:

(Reminder - a good Debt/EBITDA is under 4.5x while a good interest coverage ratio is above 5.0x)

NuStar metrics: Close to 50/50 Pipeline and storage 2017 EBITDA guidance of $600 - $650 million

  Q4-2016 Q3-2016 Q2-2016 Q1-2016 Q4-2015 Q3-2015 Q2-2015 Q1-2015 Q4-2014 Q3-2014 Q2-2014 Q1-2014 Q4-2013 Q3-2013 Q2-2013 Q1-2013
Revenues 471,757 441,418 437,804 405,703 464,919 493,566 570,661 554,944 600,392 794,422 749,745 849,213 785,387 778,145 902,014 998,186
Costs 386,384 353,464 346,587 311,138 366,895 392,572 478,206 455,633 600,392 699,324 660,391 768,110 1,013,589 709,394 825,042 934,828
EBITDA 82,597 142,262 144,667 147,536 150,641 155,071 143,018 214,006 136,031 145,058 140,110 126,705 -192,314 111,027 114,336 94,122
Total DCF dollars 100,583 100,479 105,586 109,793 102,393 102,126 104,932 119,520 108,173 100,684 106,321 90,712 88,115 81,311 69,565 69,886
GP's DCF dollars 12,886 12,866 12,766 12,766 12,766 12,025 11,891 13,363 11,872 11,874 11,800 11,493 6,953 11,312 11,350 11,136
Net DCF dollars 87,697 87,603 92,820 97,027 89,627 90,101 93,041 106,157 96.301 88,810 94,521 79,219 81,162 69,999 58,215 58,750
Units 78,514 78,031 77,886 77,886 77,886 77,886 77,886 77,886 77,886 77,886 77,886 77,886 77,886 77,886 77,886 77,886
DCF/unit $1.1170 $1.1227 $1.1917 $1.2457 $1.1507 $1.1568 $1.1946 $1.3630 $1.2364 $1.1403 $1.2136 $1.0171 $1.0421 $0.8987 $0.7474 $0.7543
Upcoming Distrib. $1.095 $1.095 $1.095 $1.095 $1.095 $1.095 $1.095 $1.095 $1.095 $1.095 $1.095 $1.095 $1.095 $1.095 $1.095 $1.095
Coverage 1.020 1.025 1.0883 1.138 1.051 1.056 1.091 1.245 1.129 1.041 1.108 0.929 0.952 0.821 0.683 0.689
* Q4-16 EBITDA include a $58.7 million non-cash charge related to the asphalt marketing business sold to Axeon in 2014. I added that back to compute LTM EBITDA numbers + credit metrics.
Broker1_DCF/unit $1.12 $1.12 $1.19 $1.25 $1.15 $1.15     $1.22              
Broker2_DCF/unit   $1.117 $1.192 $1.246 $1.151 $1.147 $1.183 $1.371                
NS 'Total debt' 3,068,364 3,160,049 3,205,693 3,206,650 3,163,349 3,151,359 3,120,616 3,033,413 2,826,452 2,752,951 2,726,629 2,710,117 2,655,553 2,752,951 2,500,948 2,655,553
NS reported Debt coverage x x x 4.6x 4.5x 4.4x 4.3x 4.1x 4.0x 4.0x 4.4x 4.4x 4.4x 4.3x 4.4x 4.4x
Due to NS having negative EBITDA in Q4-13, my normal method of calculating debt metric would produce a distorted picture for several quarters
The 'reported' numbers from earnings releases were provided as a substitute. The numbers below are regular calculations when no quarterly EBITDA's were negative
Q4-13 had non-cash write-downs of $304.453 - adding that to the negative EBITDA of $192.314 produces a $112.139 adjusted EBITDA number that I will use as a substitute
LTM EBITDA 575,762* 582,106 597,915 596,266 662,736 648,126 638,113 635,195 547,894 524.012 489.981 464.207 431.624 397.113    
Long term debt 3,014,364 3,153,049 3,205,693 3,055,612 3,079,349 3,109,359 3,074,616 2,987,413 2,749,452 2,731,551 2,726,629 2,710,117 2,655,553 2,439,696    
Debt/EBITDA 5.23x 5.42x 5.36x 5.12x 4.65x 5.18x 4.82x 4.70x 5.02x 5.21x 5.56x 5.84x 6.15x 6.14x    
Short Term Debt 54,000 7,000 0 84,000 84,000 42,000 46,000 46,000 77,000 21,400 0 0 0 33,982    
Total Debt 3,068,364 3,160,045 3,205,693 3,206,650 3,163,349 3,151,359 3,120,616 3,033,413 2,826,452 2,752,951 2,726,629 2,710,117 2,655,553 2,473,678    
Total Debt/EBITDA 5.33x* 5.43x 5.36x 5.38x 4.77x 4.86x 4.89x 4.78x 5.16x 5.25x 5.56x 5.84x 6.15x 6.23x    
Interest Expense 34,976 35,022 34,229 34,123 33,559 33,448 32,824 32,037 31,735 33,007 33,122 34,417 34,270 30,823    
Interest Coverage 4.04x* 4.06x 4.32x 4.49x 4.64x 4.36x 6.68x 4.25x 4.39x 4.23x 3.68x        

On August 19, 2013, NuStar Logistics issued $300.0 million of 6.75% senior notes due February 1, 2021
On January 22, 2013, NuStar Logistics issued $402.5 million of 7.625% fixed-to-floating rate subordinated notes due January 15, 2043
Those bonds pay 7.625% till 2018 - and LIBOR + 6.734% after that
On February 2, 2012, NuStar Logistics issued $250.0 million of 4.75% senior notes due February 1, 2022
At the end of Q3-15, NS debt was $3.151 billion while equity was $1.654 billion - S&P rated BB+

Note - To demonstrate its strong support for the transaction, NuStar GP Holdings, LLC (NYSE:NSH) has agreed to forgo all IDR cash distributions to which it would be entitled from any NuStar Energy L.P. common equity issued after signing the acquisition agreement for a period of ten quarters (capped at $22 million in the aggregate) from the date of the acquisition closing. (There is no telling if this 'good' adjustment will make the task of computing a good "DCF available to the limited partners" a much more difficult one.)

Moody's reviews NuStar's ratings for downgrade following Navigator acquisition

Global Credit Research - 12 Apr 2017

Approximately $1.8 billion of rated debt affected

New York, April 12, 2017 -- Moody's Investors Service (Moody's) placed the ratings of NuStar Energy L.P. (NuStar) and NuStar Logistics L.P. (NuStar Logistics) under review for downgrade, including the Ba1 Corporate Family Rating (NYSE:CFR), the Ba1-PD Probability of Default Rating (PDR), Ba1 senior unsecured notes ratings, Ba2 subordinate notes ratings, and the Ba3 preferred stock rating. NuStar's SGL-3 Speculative Grade Liquidity Rating is not affected by this action.

RATINGS RATIONALE

These actions follow NuStar's announced acquisition of Navigator Energy Services, LLC (Navigator, unrated) for $1.475 billion likely using a combination of debt and equity. Navigator has oil gathering, transportation, and storage operations in the Permian Basin. The acquisition is expected close in May 2017.

"Even though the Navigator transaction will give NuStar entry into the growing Permian Basin where producer activity continues to increase along with volumes, the increased debt and equity burden will unfavorably impact the already elevated leverage and reduce distribution coverage," said RJ Cruz, Moody's Vice President.

The review will focus on the final financing structure for the acquisition and the magnitude and timing of the EBITDA contribution from the acquired Navigator assets given the high multiple (based on the acquisition's current estimated EBITDA) being paid. The review will consider the resulting credit metrics for the company following the transaction as they were stretched even prior to this transaction. The acquisition entails inherent execution risk and competition from existing and future systems in an area where NuStar does not operate currently, The review is likely to be concluded by the end of May when the transaction closes.

The ratings could be downgraded if Debt/EBITDA is expected to remain above 5.5x or distribution coverage falls below 1x for a sustained period. On the other hand, while an upgrade is not likely in the near-term, Debt/EBITDA approaching 4.5x on a sustainable basis and distribution coverage maintained above 1.1x could result in an upgrade.

NuStar's credit profile is supported by the breadth of the company's refined product and crude oil pipeline transportation infrastructure, storage and terminal assets. NuStar's EBITDA is over 95% fee-based, with EBITDA in the Eagle Ford Shale supported by long-term contracts with minimum volume commitments. However, the company is confronted with rising financial leverage, as EBITDA has declined, with excess Eagle Ford Shale volumes declining to minimum contracted levels, and the company relying on debt to fund its capital investments. NuStar has needed to issue additional equity or equity-like securities in order to improve financial leverage and to maintain adequate liquidity. In addition, credit accretion is limited by NuStar's master limited partnership (NYSE:MLP) corporate finance model, which entails high distribution payouts.

Disclosure: I am/we are long GEL.