CS: Distribution at Risk Again with Termination of NGL Acquisition
Credit Suisse downgrades NuStar Energy LP
Distribution at Risk Again with Termination of NGL Acquisition; DOWNGRADING to UNDERPERFORM (from Neutral); Lowering ests & TP to $47 (from $49)
Downgrading to Underperform (from Neutral): We believe NS' distribution is once again at risk to a cut following TexStar's termination of the NGL acquisition. In our view, the crude AND NGL acquisitions were essential to ensuring NS' ability to cover its distribution by 2014. Based on our estimates, NS will not cover its distribution until 2016. Given the material impact of this failed transaction, we expect units to once again reflect the risk of a distribution cut.
TexStar NGL Acquisition Terminated: Late Friday (3/1) afternoon, NS released its 10-K which stated that TexStar notified NS that it intended to terminate the NGL acquisition. While NS maintained its guidance to cover its distribution by 4Q13, we believe this guidance is impaired given the materiality of the NGL acquisition (~15% of 2013E EBITDA).
Distribution Cut Risk Back on the Table: At best, we do not forecast NS to cover its distribution until 2016. At worst, we continue to believe NS may be forced to cut its distribution given (1) the length of time until we forecast a fully covered distribution, (2) an over-levered balance sheet, (3) limited access to capital and (4) execution risk on its organic growth capital plan. Were NS to cut its distribution, we estimate its fee-based assets could support a distribution of $3.74/unit (15% cut).
Lowering Estimates & TP to $47 (from $49): We lowered our DCF/unit forecasts to remove the impact of the previously anticipated NGL acquisition. Our DDM assumes a 9.0% discount rate, a five year distribution CAGR of -0.9% and a 0.0% terminal growth rate. We are revising our 2013/2014/2015 EPU estimates to $2.16/$2.35/$2.45 (from $1.86/$2.21/$2.55) respectively.