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NuStar (NS) Breaks Even in Q4 Earnings, Announces Merger

Zacks

NuStar Energy L.P.’s NS earnings broke even in fourth-quarter 2017, comparing unfavorably with the Zacks Consensus Estimate of earnings per limited partner unit of 18 cents.

The owner and operator of crude oil and refined products pipelines, and storage facilities’ bottom line suffered due to a light quarter from the ‘Pipeline’ segment, amid higher operating and depreciation costs. Lower products sale in the Fuels Marketing unit also led to weaker-than-expected earnings. However, the bottom line significantly improved from the year-ago quarter’s loss of 31 cents.

NuStar’s operating income was $74 million, down 13.3% from the prior-year quarter. However, the partnership recorded a net income of $25.2 million in the quarter under review, against a net loss of $11.1 million.

Quarterly revenues of $450.5 million surpassed the Zacks Consensus Estimate of $432 million. However, the top line was slightly lower than the year-ago level of $471.7 million.


Nustar Energy L.P. Price, Consensus and EPS Surprise

NuStar announced a quarterly distribution of $1.095 per unit ($4.38 per unit annualized) that remains unchanged from its previous-quarter distribution. The distribution is payable on Feb 13 to unitholders of record as of Feb 8, 2018.

Per NuStar’s latest earnings release, distributable cash flow available to limited partners in the fourth quarter was $41.7 million (providing 0.41x distribution coverage) compared with $87.7 million (providing 1.02x distribution coverage) in the year-ago quarter.

Segmental Performance

Pipeline: Total quarterly throughput volumes in the segment were 1,176,865 barrels per day (Bbl/d), up 27.7% from the year-ago period. While throughput volumes in the crude oil pipelines jumped 82.4% (owing to higher contribution from Permian crude system) from the year-ago quarter to 682,511 Bbl/d, refined product pipelines throughput fell 9.6% to 494,354 Bbl/d. As a result, throughput revenues rose 6.6% year over year to $130.9 million. However, operating and depreciation expenses rose 11.6% and 52.6% respectively. Concurrently, the segment’s operating income of $52.8 million was down 14.2% from the year-ago figure of $61.5 million.

Storage: Throughput volumes in the Storage segment plunged 55.2% year over year to 353,617 Bbl/d. Nevertheless, higher storage terminal revenues, on the back of stronger contribution from Permian Crude System and the Martin Terminal acquisition drove the unit’s quarterly revenues from $148 million in the fourth quarter of 2016 to $152.9 million in the quarter under review. Moreover, the segment's operating income also witnessed a slight increase of 4.1% to come in at $50.3 in the reported quarter.

Fuels Marketing: The unit reported operating earnings of $2.1 million, lower than the income of $3.1 recorded in the prior-year quarter. The results were adversely affected by lower product sales that declined about 18% in the quarter, amounting to $168.8 million. However, the weak results were partly offset by lower operating expenses that saw a decline of 53% in the quarter under review.

Balance Sheet

As of Dec 31, 2017, NuStar — whose peers include Magellan Midstream Partners L.P. MMP and Buckeye Partners L.P. BPL among others — had cash and cash equivalents of $33.6 million. The partnership’s total debt was $3,648.1 million, which represents a debt-to-capitalization ratio of 59.5%.

Important Updates

Along with releasing fourth-quarter earnings results on Feb 8, the partnership also announced a significant corporate restructuring. It is set for a merger with its general partner, NuStar GP Holdings LLC NSH, through a unit-for-unit exchange. As a result, NuStar GP Holdings will become a wholly owned subsidiary of the partnership, leading to the elimination of incentive distribution rights (IDRs) and 2% economic general partner interest in the partnership. The elimination of IDRs and restructuring will likely lower the cost of capital, thereby creating a more efficient and transparent structure.

Further, as part of the merger, NuStar will slash its annual distributions by around $200 million. The partnership is set to reduce its quarterly distribution to 60 cents per common unit ($2.40 per unit annualized) from the current quarterly distribution of $1.095 per unit (or 4.38 per unit annualized). The changed payout will be effective from the first-quarter 2018 distribution, payable in May 2018.

The savings will be utilized to pay off debts and fund growth projects of the partnership. The reduced investor payout reflected the pessimism surrounding the stock as it fell to a record intraday low of $24.64 on Feb 8 to eventually close at $25.30. Units of this Zacks Rank #3 (Hold) partnership has been consistently declining since the announcement, closing at $23.99 on Feb 12. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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