On Feb 12, 2013, we upgraded San Antonio-based publicly traded partnership NuStar Energy L.P. (NS) to Neutral from Underperform, reflecting a balanced risk/reward profile. Our new investment thesis is supported by a Zacks Rank #3 (Hold).
Why the Upgrade?
We like NuStar for its diversified asset base and robust distribution-growth prospects. A strong pipeline of organic growth projects and contribution from acquisitions provide the partnership with an above peer-group average distribution coverage ratio.
NuStar has a track record for consistent distribution growth – its current quarterly distribution of $1.095 per unit ($4.38 per unit annualized) is up approximately 120% over its distribution rate at the time of its IPO in 2001.
Furthermore, the majority of NuStar’s business is derived from an attractive set of fee-based storage and transportation assets that support the U.S. and international energy infrastructure.
Over the last few years, the partnership has consolidated its business through a combination of organic efforts and accretive acquisitions. We also welcome NuStar’s recently formed asphalt joint-venture partnership with a private investment firm that is aimed at reducing the pipeline operator’s unpredictability about its future cash flows, while trimming the requirement for large working capital investment.
However, we believe these positives are already reflected in its current valuation, so there is not much upside from the current price level.
NuStar – which was spun off from the U.S. refiner Valero Energy Corp. (VLO) in 2006 – recently reported grim fourth-quarter 2012 results, with earnings per unit (EPU) of 25 cents that came lower than the Zacks Consensus Estimate of 31 cents. Comparing year over year, reported result declined from the adjusted profit of 30 cents. The underperformance was mainly on account of higher operating expenses in its storage business.
We also remain concerned about NuStar’s high debt levels, which leave the partnership vulnerable to an extended downturn. As of Dec 31, 2012, NuStar had debt (including current portion) of $2.4 billion, representing a debt-to-capitalization ratio of around 48%.
Stocks that Warrant a Look
While we expect NuStar to perform in line with its peers and industry levels in the coming months and advice investors to wait for a better entry point before accumulating shares, one can look at McDermott International Inc. (MDR) and Patterson-UTI Energy Inc. (PTEN) as good buying opportunities. These energy equipment suppliers – sporting a Zacks Rank #2 (Buy) – have solid secular growth stories with potential to rise from current levels.
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