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 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.
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.