Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



1 Energy Stock to Avoid

Shares of midstream company NuStar Energy (NYSE: NS  ) fell after an analyst at Credit Suisse downgraded NuStar from neutral to underperform. Is now the time to bail? Or did the 7% drop in price create a buying opportunity? Let's take a closer look at NuStar and the reasons behind the downgrade.

A quick look at NuStar
The San Antonio-based master limited partnership has operations in the U.S., Canada, and Mexico, but unlike almost all other midstream companies, also offers investors international exposure with assets in the Netherlands, the U.K., the Caribbean, and Turkey.

The company's assets include 87 terminals with about 96 million barrels of storage capacity, and 8,634 miles of crude oil and refined products pipelines. Its best performing business unit is its transportation segment, which generated $47.95 million in operating income for the fourth quarter of 2012.

By most accounts, NuStar did not have a great fourth quarter. In an effort to move more toward fee-based revenue -- which is reliable and correlates to a reliable distribution -- the partnership is going through a bit of a restructuring. It sold its asphalt and fuels refinery in San Antonio and is refocusing on storage and transportation business, specifically targeting the Eagle Ford Shale for acquisition and organic growth opportunities.

The drop
The Credit Suisse downgrade comes on the heels of a NuStar SEC filing that intimates TexStar wants out of the second half of its $100 million deal to sell assets to NuStar. After successfully acquiring a crude oil pipeline, gathering, and storage assets, the pending acquisition of a natural gas liquids pipeline is now up in the air, and NuStar is evaluating its legal options. According to Bloomberg, Credit Suisse analyst Brett Reilly fears a failure to acquire these TexStar assets will force NuStar to cut its distribution.

Right now, NuStar sports an 8.7% yield and an annualized distribution of $4.38 per unit, which is one of the higher yields going in an industry known for its payouts. However, NuStar's distribution coverage for the fourth quarter was not ideal, coming in at 0.67 times, slightly better than its full year coverage of 0.63 times. Compare that to the full-year or fourth-quarter distribution coverage for other midstream players:

  • Plains All American (NYSE: PAA  ) , full year 1.51 times 
  • Kinder Morgan Energy Partners (UNKNOWN: KMP.DL  ) , fourth quarter 1.16 times 
  • Enterprise Products Partners (NYSE: EPD  ) , full year 1.3 times

Anything over 1.0 is a strong coverage ratio, anything below it calls into question a partnerships ability to continue to pay its distribution, so the downgrade from Credit Suisse does not seem that unwarranted.

Foolish takeaway
This may be rock bottom for NuStar, and while I certainly wouldn't advocate buying it right now, I do think the focus on fee-based revenue and building out its Eagle Ford assets bode well for the future. The first-quarter earnings call should give investors some more insight about the future of NuStar, regardless of what happens with the TexStar NGL pipe.

Enterprise Products Partners had a banner year, and its distribution coverage ratio is pretty alluring. To help investors decide whether Enterprise Products Partners is a buy or a sell today, click here now to check out The Motley Fool's brand-new premium research report on the company.

Read/Post Comments (0) | Recommend This Article (8)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2293874, ~/Articles/ArticleHandler.aspx, 9/27/2016 6:36:48 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 18,228.30 133.47 0.74%
S&P 500 2,159.93 13.83 0.64%
NASD 5,305.71 48.22 0.92%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/27/2016 4:02 PM
NS $47.55 Down -0.07 -0.15%
NuStar Energy CAPS Rating: ***
EPD $26.93 Down -0.19 -0.70%
Enterprise Product… CAPS Rating: ****
KMP.DL $0.00 Down +0.00 +0.00%
Kinder Morgan Ener… CAPS Rating: *****
PAA $29.43 Down -0.63 -2.10%
Plains All America… CAPS Rating: ****