Ahead of Earnings, Buy NuStar

We are maintaining our Buy recommendation and earnings estimates for NuStar Energy, L.P. (NS - Snapshot Report) units ahead of the partnership’s second-quarter results. We continue to like the partnership for its diversified asset base, strong distribution-growth prospects and attractive valuation.

The inclusion of the asphalt business in the asset mix further adds to the partnership’s diversification and 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. We estimate that the partnership can sustain distribution-growth in the 8%-9% annual range over the next few years.

The recent acquisition of CITGO’s asphalt assets help diversifies the partnership’s operations and further increases its growth prospects. The partnership currently has a number of ongoing projects, which are expected to start contributing to results over the next twelve months. NuStar’s current quarterly distribution represents a 7.7% year over year increase to an annualized run rate of $3.94 per unit, representing an attractive yield of 8.42%. With an above peer-group average distribution coverage level and a GP IDR cap of 25%, NuStar’s distribution growth prospects remain very attractive.

Given the partnership’s comfortable distribution coverage ratio, improved distribution-growth prospects and expected completion of a number of growth projects in the near term, and the 25% general partner distribution split, we continue to see upside from current levels. Our new $54 price objective, reduced from $59 before, reflects a distribution run rate of $4.25 per unit and yield of 7.87%. Our yield assumption is based on a 337 bps spread, in line with other faster growing MLPs, over our 10-year Treasury bond yield expectation of 4.50% over the next 12 months.

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