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Following NuStar Energy L.P.’s (NS - Analyst Report) grim third quarter results, we have recalibrated our investment thesis on the midstream energy partnership to Underperform from Neutral.

San Antonio, Texas-based NuStar is a master limited partnership (MLP), which engages 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. The partnership has interests in asphalt refining and marketing in the U.S. and is the second largest independent liquids terminal operator in the nation.

NuStar’s current asset base includes 8,417 miles of pipelines, 90 terminal facilities, 4 crude oil storage tank facilities, a fuels refinery with a processing capability of 14,500 barrels per day, and 50% interest in 2 asphalt refineries with a combined throughput capacity of 104,000 barrels per day. The partnership's combined system has more than 94 million barrels of storage capacity.

NuStar recently reported weak third quarter profits, hamstrung by lower margins in 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) – excluding special items – of 19 cents, well below the Zacks Consensus Estimate of 50 cents and the year-ago profit of 92 cents.

Though we welcome the partnership’s decision to sell a 50% stake in its volatile asphalt operations, the continued poor outlook for the sector will be a further drag on NuStar’s near to medium term EBITDA.

We also remain concerned about NuStar’s high debt levels, which leave the partnership vulnerable to an extended downturn. As of September 30, 2012, NuStar had long-term debt (including current portion) of more than $2 billion, representing a debt-to-capitalization ratio of around 43%.

Considering these factors, we see NuStar – which was spun off from the U.S. refiner Valero Energy Corp. (VLO - Analyst Report) in 2006 – as a risky bet from which ordinary investors should exit. Our new long-term Underperform recommendation is supported by a Zacks #5 Rank (short-term Strong Sell rating).

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