NuStar Energy L.P. (NS) – owner/operator of crude oil and refined products pipelines and storage facilities – has priced a public offering of 6,200,000 common units at $48.94 a piece, with a 30-day over-allotment option for an additional 930,000 units.
The transportation and storage master limited partnership (MLP) plans to use the net proceeds from this offering to pay back the outstanding debt under its revolving credit facility, to finance potential future acquisitions, and for general partnership purposes. The offering is expected to close on September 10, 2012.
As per NuStar, William E. Greehey – the chairman of NuStar's general partner, NuStar GP Holdings LLC (NSH) – may purchase approximately 490,000 common units in the offering.
NuStar currently retains a Zacks #5 Rank (short-term Strong Sell rating). We are also maintaining our long-term Underperform recommendation on the unit.
San Antonio, Texas-based NuStar engages in the transportation and storage of crude oil as well as refined products in the U.S., the Netherlands Antilles, Canada, Mexico, and the U.K. The partnership is one of the largest asphalt refiners and marketers in the U.S. and the second largest independent liquids terminal operator in the nation.
NuStar recently reported grim second quarter 2012 results, with earnings per unit (EPU) of 6 cents coming significantly lower than the Zacks Consensus Estimate of 52 cents. Comparing year over year, reported result declined heavily from the adjusted profit of $1.34. The underperformance was mainly on account of losses in its asphalt and fuel marketing segment (which contribute roughly half of total profits).
Though we welcome the partnership’s announcement to sell a 50% stake in its volatile asphalt operations, the non-cash write-down associated with the transaction was a further drag on NuStar’s June quarter EBITDA.
We also remain concerned about NuStar’s high debt levels, which leave the partnership vulnerable to an extended downturn. As of June 30, 2012, NuStar had debt (including current portion) of more than $2.6 billion, representing a debt-to-capitalization ratio of 52.0%.
Finally, over the last few years, NuStar has consolidated its business through a combination of organic efforts and accretive acquisitions. We believe the higher operating expenses associated with this expanded asset base may lead to reduced returns going forward.
Given these concerns, we expect NuStar to perform below its peers and industry levels in the coming months, which gives investors little reason to hold the stock.
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