New Era at NuStar

05/05/2015 7:00 am EST


Igor Greenwald

Chief Investment Strategist, MLP Profits

This new buy recommendation capitalizes on an expanding midstream footprint in the fast-developing Eagle Ford shale in Texas and a vast network of storage tanks newly in demand amid a glut of crude, explains Igor Greenwald, editor of MLP Profits.

This is a new era for NuStar (NS), which has a very different business than just a few years ago. Gone is an asphalt joint venture done in by soaring crude costs and a refinery in San Antonio was also sold.

Added since were hundreds of miles of strategic pipeline in the Eagle Ford, including a system purchased in late 2012 for a fraction of what it would most likely fetch today.

As a result, pipeline income, which accounted for 55% of NuStar’s total last year, rose 18% in 2014, propelled by the 20% surge in crude throughput attributable largely to the Eagle Ford.

Eagle Ford, the most economical US shale, is less at risk of a dramatic production slump than any other, in part because its proximity to the coast holds down shipping costs and ultimately boosts producer margins.

Meanwhile, NuStar controls an aggregate storage capacity of 93 million barrels. Storage pricing is continuing to improve amid a global buildup of crude and product stocks.

NuStar’s pipeline contracts have typical terms of three to five years, with regulated, inflation-adjusted tariffs and minimum volume commitments.

Although NuStar’s unit price has held up remarkably well through the oil crash and the MLP correction, it still yields an annualized 7.2%.

Debt remains high at 5.2 times 2014 EBITDA, but it’s notable that NuStar has generated free cash flow for the last two years and has not issued equity in more than two years.

Meanwhile, chairman of the board Bill Greehey, who built Valero (VLO) and has been involved with NuStar from the beginning, has been buying. He spent $6.1 million on units in five separate transactions between February 20 and March 2 to bring his stake in the LP units to 3.6%.

Greehey, 78, holds a much larger 19.1% stake in the units of NuStar’s general partner, NuStar GP Holdings (NSH), which owns 15% of NuStar as well as its incentive distribution rights and would be the primary beneficiary in the entirely plausible event of an acquisition.

NSH currently yields 6.2%, though it hasn’t raised its own K-1 distribution in more than two years.

Overall, the Eagle Ford crude business is likely to remain a big rainmaker over the long haul, within a much larger, steady-earning asset base serving the needs of longtime customers such as refiners. We’re adding both NS and NSH to our Growth Portfolio.

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