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
|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|
|* 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.|
|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|
|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|
|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|
|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 2017Approximately $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.
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.