NuStar Energy (NYSE:NS), like many midstream MLPs, has struggled in the aftermath of the oil market downturn. The company had too much debt and a high dividend payout ratio, which handcuffed its ability to fund expansion projects. That forced it to undertake several actions to improve its financial profile, including merging with its parent, slashing its high-yielding payout, and selling assets.

As a result, the company is in a much better position to fund growth while still paying a generous 8.7%-yielding dividend to investors. While NuStar still has some work to do, it's worth watching given its upside potential as the company continues turning things around.

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What a difference a year makes

NuStar Energy has come a long way in the past year. In early 2018, the company unveiled a comprehensive turnaround plan to improve dividend coverage, reduce leverage, and position itself for growth. NuStar would go on to vastly outperform the goals it set by ending the year with a 1.42 times dividend coverage level -- well above its target range of 1.1 to 1.2 -- and achieving its three-year deleveraging goal in one year. As a result, the company now has the financial flexibility to fund growth through at least 2022.

One of the drivers of the quick turnaround was the company's decision to sell its UK/European assets for $270 million last fall, which enabled it to pay down some debt. That gave it the financial flexibility to go ahead with several high-return expansion projects that should drive growth over the next few years. For example, the company signed a deal to connect its South Texas Crude System to the Plains All American (NYSE:PAA) Cactus II Pipeline, sending crude to NuStar's North Beach Terminal in Corpus Christi, Texas, for export. Overall, the company expects to invest $500 million to $550 million this year on oil gathering projects in the Permian Basin as well as downstream export-related ones like Corpus Christi. These expansions position the company to grow earnings at a healthy rate over the next few years.

A calculator and pen on top of $100 bills.

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What NuStar still needs to do

NuStar Energy ended last year with a much-improved leverage ratio of 4.05 times debt-to-EBITDA. However, leverage will likely rise to 4.3 times this year -- above its sub-4.0 target -- as the company invests heavily on expansion projects. That's just one area of concern for a company that has a weaker balance sheet compared with rivals like Plains All American Pipeline.

Another is NuStar Energy's credit rating, which remains in junk territory. For comparison, Plains All American has a solid investment-grade rating, backed by a lower 3.4 leverage ratio. NuStar also has significant debt maturities in 2020 that it needs to address, with nearly $1.3 billion of its $3.1 billion total borrowings coming due next year. While the company believes it can get past this tighter spot as its expansion projects come on line, it remains an area of concern.

In addition, distribution coverage will fall to a range of 1.2 to 1.3 times this year because the company needs to invest in several maintenance projects. Because of those two factors, the company isn't yet in a position to start returning more cash to investors. That puts it a step behind rivals like Plains All American, which have either already restarted dividend growth or expect to in 2019. On a positive note, NuStar could begin returning more money to investors next year when its current slate of expansions start generating cash, and it refinances its upcoming debt maturities.

Interesting upside if everything goes right

NuStar is still in the earlier stages of turning around its operations. The company made excellent progress last year. However, its key financial metrics will take a step back because 2019 will be a heavy investment year. While the higher spending positions the company for strong growth, investors might want to watch the turnaround from the sidelines until its expansion projects start delivering and it addresses its 2020 maturities.