Are you down with MLPs? Master limited partnerships, which are tax-advantaged, high-yielding investment vehicles, were a hot commodity in 2007. In response to high demand, particularly from institutional investors, everyone from Devon (NYSE: DVN) to Pioneer Natural Resources (NYSE: PXD) began looking at ways to package predictable cash-generating assets into MLPs.
When the market turned mushy, MLPs were dealt with most harshly. These cash-flow vehicles tend to depend on the capital markets for follow-on share offerings, so the appetite for them has dried up quite a bit. Note that both of the aforementioned companies failed to launch their proposed MLPs in 2007.
Another example is the sagging share price of NuStar Energy (NYSE: NS) and its general partner, NuStar GP Holdings (NYSE: NSH). In its quarterly conference call on Friday, the company noted that its share slump is "absolutely unwarranted," and I tend to agree.
For one, the company is primarily a toll taker. It handles and stores other companies' products. Customers such as Valero (NYSE: VLO), Tesoro (NYSE: TSO), and ConocoPhillips (NYSE: COP) all have tremendous sunk costs at their refinery operations, so they have every incentive to max out their throughput, even when margins sag. This situation places NuStar in an enviable position during downturns.
So that takes care of recession fears. How about the concern that Venezuela will renege on its asphalt supply agreements, proposed in tandem with NuStar's yet-to-close purchase of various CITGO assets? This was the most common theme during the Q&A session, and again, management was a bit perplexed. They see it in Venezuela's best economic interest to continue exports, but even if an unexpected disruption occurs, this still looks favorable for NuStar. Asphalt margins would improve in response to the even tighter supply that would result. Relatively inexpensive modifications could be made to the refineries in order to process feedstock from Canada or elsewhere.
Insiders continue to load up on shares, and after this conference call I definitely understand their confidence in the business.
