NuStar, EOG in Construction Pact

NuStar Energy L.P. (NS - Analyst Report) has signed an agreement with two subsidiaries of EOG Resources (EOG - Analyst Report) -- EOG Resources Rail Yard (Louisiana) LLC and EOG Resources Marketing -- to construct a rail offloading facility in St. James, Louisiana. This 70,000-barrel-per-day unit will be engaged in the transportation and storage of crude oil production from Bakken, Eagle Ford and other developing shale plays in the United States.

NuStar, which executed the deal through its subsidiary NuStar Logistics, owns one of the largest 8-million-barrel terminals in the growing St. James crude oil hub. This system remains well connected to all major crude infrastructure including major onshore and offshore pipeline network, as well as marine, truck and rail access.

Under the agreement, the two companies will build new rail and unit train unloading facilities along with two new storage tanks with a combined capacity of 360,000 barrels. The rail project is slated to be completed in the first quarter of 2012, while the tanks are scheduled to come online in May 2012.

NuStar management remains highly optimistic about this alliance with EOG and stated that customers will benefit greatly from the services of the newly constructed plant.

San Antonio, Texas-based NuStar Energy is involved 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 current asset base includes 8,417 miles of pipelines, 90 terminal facilities, 4 crude oil storage tank facilities, and 2 asphalt refineries and a fuel refinery with a combined throughput capacity of 118,500 barrels per day.

We like NuStar Energy for its diversified asset base and robust distribution-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.

However, we remain concerned about the slowdown in demand growth for refined products (which adversely affects pipeline and terminal throughput), as well as cost overruns on expansion projects (that leads to lower returns) and higher business risk associated with NuStar’s more volatile asphalt operations. Hence, we maintain our long-term Neutral rating on the stock.

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