NuStar's EPS Misses, Revs Beat

San Antonio-based publicly traded partnership NuStar Energy L.P. ( NS - Analyst Report ) announced mixed second quarter 2012 profits, bruised by poor performing asphalt and fuels marketing business unit, but partially offset by high-returns from a number of completed projects.

The owner and operator of crude oil and refined products pipelines and storage facilities reported earnings per unit (EPU) of 6 cents, significantly lower than the Zacks Consensus Estimate of 52 cents. Comparing year over year, reported result declined heavily from the adjusted profit of $1.34.

However, revenue of $1,901.9 million surpassed our expectation of $1,408.0 million and was 19.7% higher than the year-earlier level, as product sales increased 21.8%.

Quarterly Distribution

NuStar announced a quarterly distribution of $1.095 per unit ($4.38 per unit annualized), flat year over year as well as sequentially. The new distribution is payable on August 10 to unitholders of record as of August 7, 2012.

Distributable cash flow (DCF) available to limited partners for the second quarter was $16.9 million or 24 cents per unit (providing 0.22x distribution coverage) compared with $119.4 million or $1.85 per unit in the year-earlier quarter.

Segmental Performance

Transportation: Quarterly throughput volumes in the Transportation segment were down 6.3% year over year at 734,182 barrels per day. The decline was primarily due to lower crude oil and refined products pipeline throughputs.

However, these factors were more than offset by higher pipeline revenues, better tariff and additional sales generated by the Eagle Ford shale projects. As a result, segment operating income increased 5.6% year over year to $31.9 million. Operating revenue was up 5.6% at $75.6 million.

Storage: Throughput volumes in the Storage segment rose 7.8% year over year to 747,774 barrels per day. Revenues increased approximately 9.5% to $152.8 million on the back of an 8.9% hike in the storage lease revenue.

Quarterly operating income reached $54.1 million (up 26.4% year over year), driven by contributions from the recently completed offloading facility project and the storage expansion venture at the St, James, Louisiana terminal in Eagle Ford shale, last year.

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 an operating loss of $292.6 million, as against a profit of $72.1 million in the second quarter of 2011.

In early July, NuStar announced its decision to sell off its 50% interest in the asphalt operations to Lindsay Goldberg LLC, in an attempt to raise fund to pay down debt. The deal will likely be closed by the end of September.

Per the terms, a subsidiary of Lindsay Goldberg will pay $175 million for the stakes of the asphalt refining assets. Both the companies have also agreed to form a joint venture, with 50% voting interest for each, to conduct the operations of the asphalt business.

2012 Outlook

For the balance of 2012, NuStar expects to see higher EBITDA (earnings before interest, taxes, depreciation and amortization) than the 2011 level, owing to the completion of pipeline projects in the Eagle Ford Shale and expansion project at the St. Eustatius terminal along with adjustment in FERC (Federal Energy Regulatory Commission) tariff rate.

The partnership expects Storage unit EBITDA to be higher than the 2011 level by $25 million to $35 million, while that of the transportation segment will likely improve by $10 million to $20 million over the same period.

However, according to NuStar, poor earnings in asphalt and fuels marketing operations will pull down the Asphalt and Fuels Marketing segment’s results from 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 #5 Rank that implies a Strong Sell rating for the short run. We are also maintaining our long-term Underperform recommendation on the units.