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Bear of the Day

Following NuStar Energy, LP's (NS) grim second quarter interim update, we are recalibrating our investment thesis on the midstream energy partnership to Underperform from Neutral. NuStar recently cautioned investors that losses in its asphalt and fuel marketing segments (which together contribute roughly half of total profits) will adversely impact its results.

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 will be a further drag on NuStar's June quarter EBITDA. We are also concerned by the partnership's high leverage.

Considering these headwinds, we expect NuStar to perform below the industry, which gives investors little reason to hold the stock. This is corroborated by our new Underperform recommendation. Our $48 price objective reflects a 2012 P/E multiple of 19.1x.

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