NuStar Energy Shining Brightly

NuStar Energy L.P. (NS - Snapshot Report) is expected to post solid third-quarter results on the back of stronger margins and higher sales volumes from the new asphalt business and increased pipeline throughput. We continue to like the partnership for its diversified asset base and strong distribution-growth prospects. Our new $56 price objective, up from $54 before, reflects a distribution run rate of $4.25 per unit and yield of 7.65%.

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. NuStar’s current quarterly distribution of $0.985 per unit represents an attractive yield of 8.15%. 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 helps diversify 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.

On August 29, NuStar provided interim third-quarter guidance. Management plans to recommend a distribution increase to the Board of Directors for the third quarter. Third quarter earnings are expected to be strong as the partnership hopes to gain from the strong asphalt market. The partnership’s margin for the third quarter is expected to be in the range of $15 to $20 per barrel due to much higher asphalt prices and lower feedstock costs.

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