Leading pipeline operator and asphalt refiner NuStar Energy L.P. (NS - Analyst Report) announced its decision to sell off its 50% interest in the asphalt operations, in an attempt to raise fund to pay down debt. In this regard, NuStar entered into a Purchase and Sale Agreement with the privately held investment firm Lindsay Goldberg LLC.
Per the terms, a subsidiary of Lindsay Goldberg will pay $175 million for the stakes of the asphalt refining assets. Both companies have also agreed to form a joint venture, with 50% voting interest for each, to conduct the operations of the asphalt business.
The transaction, which is expected to be closed before September 30, includes NuStar’s two asphalt refineries – one in Paulsboro, New Jersey and the other in Savannah, Georgia – with a combined daily capacity of 104,000 barrels plus the associated inventory.
San Antonio-based NuStar will likely obtain cash proceeds of $400 million to $500 million from the agreement, depending on the working capital requirements of the joint venture. NuStar will get the payment for the inventories transferred, when the deal gets closed, and will be financed through a credit facility.
Taking in the effects of this disposition, NuStar expects to witness lower earnings before interest, taxes, depreciation and amortization (EBITDA) in the second quarter compared with the prior-year quarter result of $160 million.
NuStar also apprehends that its fuels marketing business will incur a loss for the quarter, hurt by effects of the deteriorating commodity price market. Combined with the weak results of the company’s asphalt segment, the overall second quarter earnings will likely be lower.
However, for the latter part of 2012, NuStar’s performance will be supported by the completion of two pipeline projects in the Eagle Ford Shale. Further growth opportunities in both the storage and transportation segments are expected to pull up NuStar’s EBITDA in 2013.
NuStar – which competes in the Oil and Gas Production Pipeline industry with firms like Tesoro Logistics L.P. (TLLP - Snapshot Report) and Enbridge Energy Management LLC (EEQ - Snapshot Report) – 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.
We believe that this divesture will allow NuStar to spread out the losses associated with the asphalt business units, primarily due to declining demand and steeper expenses. Additionally, the cash proceeds from the transaction can be utilized for the development of high-quality, high-return pipeline and terminal assets, apart from debt payout.
We are maintaining our long-term Neutral recommendation on NuStar.