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San Antonio-based publicly traded partnership, NuStar Energy LP (NS - Analyst Report) has entered into a fuel oil supply contract with an unnamed oil trading firm for its storage facility in the island of St. Eustatius, on the Caribbean.

Per the deal, NuStar will buy bunker fuel from the trading company for its customers in St. Eustatius and the Caribbean region. NuStar, which is the owner of storage capacity in excess of 13 million barrels in St. Eustatius, believes that this agreement will significantly diminish its working capital cost by roughly $40 to $50 million. Moreover, the partnership expects to lower its price fluctuation exposure and manage its operating cost well.

NuStar added that its bunker fuel marketing operations have been affected by unfavorable market situations and lower demand during recent months. The contract is expected to help the partnership to grow its business and tide over this situation.  

San Antonio, Texas-based NuStar is a master limited partnership (MLP) that 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.

NuStar’s exposure to asphalt business exposes it to volatility in commodity prices. Along with the inherent seasonality of the road construction business, this increases the partnership’s risk profile. As such, NuStar is not a pristine midstream MLP focused entirely on fee-based and relatively low risk infrastructure assets.

Moreover, we remain concerned about NuStar’s high debt level, which leaves the partnership vulnerable to an extended downturn. As of Jun 30, 2013, NuStar had debt (including current portion) of $2.5 billion, representing a debt-to-capitalization ratio of around 50.6%.

The partnership currently retains a Zacks Rank #5 (Strong Sell), implying that it is expected to significantly underperform the broader U.S. equity market over the next 1 to 3 months.

However, one can look at oil and gas production pipeline MLPs like Magellan Midstream Partners LP (MMP - Analyst Report), Delek Logistics Partners LP (DKL - Snapshot Report) and Pioneer Southwest Energy Partners LP that offer value. Magellan Midstream retains a Zacks Rank #1 (Strong Buy), while Delek Logistics and Pioneer Southwest Energy sport a Zacks Rank #2 (Buy).
 

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