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Publicly traded energy master limited partnership NuStar Energy L.P. (NS - Analyst Report) entered into an agreement with TexStar Midstream Services LP to spread out its presence in the Eagle Ford Shale.

Per the deal, NuStar will purchase crude oil pipeline, gathering and storage systems, plus natural gas liquids (NGL) assets for $425 million. The crude pipeline system runs from LaSalle County and Frio County to Live Oak County and can transport 100,000 barrels per day (BPD) of crude oil. It also includes 140 miles of transmission and gathering line for crude oil. The NGL assets include a 38-mile Y-grade NGL pipeline and two fractionators.

The deal will be concluded in two separate transactions. Crude oil assets will be purchased first followed by the acquisition of NGL assets. NuStar will finance the deal through borrowings under its credit facilities and junior subordinated notes.

It is expected that the acquisition of crude oil assets will be completed in early December after Federal Trade Commission review. The second part of the deal is likely to close by first quarter of 2013.

Simultaneously, NuStar also declared its plan to divest its San Antonio refinery on South Presa Street and related terminal in Elmendorf, Texas.

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. Furthermore, the majority of NuStar’s business is derived from an attractive set of fee-based storage and transportation assets that support the U.S. and international energy infrastructure.

However, over the last few years, NuStar has consolidated its business through a combination of organic efforts and accretive acquisitions. We believe the higher operating expenses associated with this expanded asset base may lead to reduced returns going forward.

Acquisitions have historically played a major role in the partnership’s growth profile and are expected to remain significant in the future. NuStar may find it difficult to complete accretive transactions moving forward, which could negatively impact its growth rate.

NuStar – which was spun off from the U.S. refiner Valero Energy Corp. (VLO - Analyst Report) in 2006 – currently retains a Zacks #5 Rank (short-term Strong Sell rating).


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