Asphalt Woes Continue to Hit NuStar

San Antonio-based publicly traded partnership NuStar Energy L.P. (NS - Analyst Report) announced weak first quarter profits, bruised by poor performance at its asphalt and fuels marketing business.

The owner and operator of crude oil and refined products pipelines and storage facilities reported earnings per unit (EPU) of 23 cents, below the Zacks Consensus Estimate of 30 cents and prior year adjusted profit of 40 cents (excluding the effect of early termination cost and other smaller items).

However, revenue of $1,735.7 million surpassed our expectation of $1,398.0 million and was 40.8% above the year-earlier level, as product sales increased 47.6%.

Quarterly Distribution

NuStar announced a quarterly distribution of $1.095 per unit ($4.38 per unit annualized), representing a 1.9% increase over the year-earlier quarter and equal to the fourth quarter 2011 distribution. The new distribution is payable on May 11 to unitholders of record as of May 8, 2012.

Distributable cash flow (DCF) available to limited partners for the first quarter was $42.7 million or 60 cents per unit (providing 0.55x distribution coverage), compared with $45.1 million or 70 cents per unit in the year-earlier quarter.

Segmental Performance

Transportation: Quarterly throughput volumes in the Transportation segment were down 2.2% year over year at 795,261 barrels per day. The decline was due to lower crude oil and refined products pipeline throughputs, hurt by a drop in the refining margins and gasoline demands at some of NuStar’s customers' refineries as well as the effect of competitive supply economics.

However, these factors were more than offset by higher pipeline revenues as a result of tariff adjustment and additional sales generated by the Eagle Ford shale projects. As a result, segment operating income increased 7.3% year over year to $36.9 million. Operating revenue was up 6.6% at $77.8 million.

Storage: Throughput volumes in the Storage segment rose 19.2% year over year to 739,076 barrels per day. Revenues increased approximately 6.3% to $145.4 million on the back of a 2.9% hike in the storage lease revenue.

Quarterly operating income reached $56.1 million (up 15.2% year over year), driven by higher rates on the existing contracts, increased customer demand for storage services and contributions from Eagle Ford shale project – St, James, Louisiana terminal – that was completed in third quarter 2011.

Asphalt and Fuels Marketing: As a result of steeper expenses and muted asphalt demand, the Asphalt and Fuels Marketing segment recorded weak performance compared with the year-earlier quarter. The unit reported operating loss of $15.8 million, as against the profit of $118,000 achieved during the first quarter of 2011.

2012 Outlook

For 2012, NuStar expects to see higher distributable cash flow and EBITDA (earnings before interest, taxes, depreciation and amortization) than the 2011 level. The partnership anticipates its Storage unit to benefit from internal growth projects.

The transportation segment is expected to benefit from completed projects in the Eagle Ford shale. Finally, according to NuStar, better earnings in asphalt, crude oil trading and heavy fuels operations will lift the Asphalt and Fuels Marketing segment’s results from the last year.

Our Recommendation

NuStar Energy – which was spun off from U.S. refiner Valero Energy Corp. (VLO - Analyst Report) in 2006 – has a Zacks #3 Rank (Hold rating) for the short run. We are also maintaining our long-term Neutral recommendation on the units.

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, as well as cost overruns on expansion projects (that leads to lower returns) and higher business risks associated with NuStar’s more volatile asphalt operations.