NuStar Energy (NS) operates through three segments. The storage division provides storage and handling facilities for crude oil, petroleum products and other liquids through 65 facilities in the United States, St. Eustatius, Nova Scotia, the U.K., the Netherlands, and Mexico. The transportation segment moves refined products, crude oil, and ammonia through about 5,600 miles of refined product pipelines, a 2,000-mile ammonia line, and 800 miles of crude oil pipes. The asphalt and fuels marketing business runs asphalt plants in New Jersey and Georgia and markets a variety of fuels, complementing the other two segments by using excess storage and transport capacity. Originally a division of Valero Energy Corp. (VLO), NuStar went public in 2001 and was spun off from Valero in 2005; the latter company still contributes nearly half of the transportation revenues and about 20% of its storage income. In 2010, storage income accounted for 43% of profits; transportation, 35%; and asphalt and fuels marketing, 22%.
Like many of its fellow oil and natural gas master limited partnerships, NuStar lifted revenues and cash distributions rapidly for some years after its inception through 2008, when a large acquisition brought it most of the asphalt business. Since then, however, distributions have risen only 3.5%, to a quarterly rate of $1.095 per limited partnership unit, or an annual rate of $4.38. The small increases of the past three years, along with some minor operating concerns, likely account for most of the unit price decline in 2011 and the issue’s high yield of 7.7%. In the oil and gas transport MLP universe, only Energy Transfer Partners, LP (ETP) yields more, while units of MLPs that have lifted their distributions faster, such as Enterprise Products Partners, LP (EPD), Williams Partners, LP (WPZ), and Magellan Midstream Partners (MMP), have raised distributions faster and now yield in the low 5% range.
Distributable cash flow per unit dropped 22% in 2010, due in part to 14% more units outstanding. But we expect DCF per unit to rise in 2011, with the help of a full year’s worth of profits from investments made last year and contributions from more projects and acquisitions in 2011. All told, capital expenditures, including about $100 million of acquisitions and $55 million of maintenance outlays, are slated to jump around 65% in 2011, to $435 million. Next year, the company expects expansion projects and acquisitions to be $350 million-$400 million, and it believes internal extensions can put around $300 million a year to work for the next few years in such fast-growing regions as the Eagle Ford shale deposit in South Texas and the Bakken shale area in North Dakota. Distributable cash flow could also benefit from lower competition and higher margins in the asphalt business as NuStar starts to process cheaper Canadian and Venezuelan heavy oils. Refinancing some high-cost debt in 2011 will help a bit, but the large capital outlays will also likely require equity financing fairly soon.
NuStar offers high current income, with prospects for cash distributions to grow next year and thereafter at a faster pace than before. And NuStar’s general partner receives just 25% of the increase in distributable cash flow as incentive distribution rights, versus 50% with many of its fellow MLPs. As with all limited partnerships, though, an investment in the units can complicate a holder’s tax returns, so we suggest that investors considering MLP investments consult a tax advisor.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.