NuStar Reports In Line Profits and Cash Flows
Recommended List selection NuStar GP Holdings (NSH, $24.86, 0.11) and its limited partner NuStar Energy (NS, $53.59, 0.66) both reported their Q3 earning results this morning. NuStar Energy delivered profits that were in line with Wall Street’s reduced expectations for the quarter and the shares moved higher. Although NuStar GP holds the general partnership interest in NuStar Energy and derives its distributable cash flow (DCF) from it, the holding company’s stock didn’t enjoy the same bounce today.
NuStar GP Holdings reported Q3 DCF of $18.9 million, or 44 cents per unit, compared to $18.3 million, or 43 cents per unit, in the year-ago period. Third quarter 2009 earnings were $17.7 million, or 42 cents per unit, compared to $34.8 million, or 82 cents per unit, for the third quarter of 2008.
The partnership’s board declared a distribution of 43.5 cents per unit, which is a half-penny per unit more than the Q2 distribution. The increase was funded by the holding company’s share of sibling NuStar Energy’s distribution of $1.065 per unit, which was up from $1.0575 in Q2.
As expected, NuStar Energy’s earnings, DCF, and revenues were all lower than a year ago due to the drop in oil prices year over year. They were also lower than management initially forecast heading into the quarter, but the company telegraphed the decline in a presentation to analysts last month.
NuStar Energy (we’ll shorten it to just NuStar from now on) reported Q3 DCF available to its limited partners of $61.5 million, or $1.13 per unit, compared to $156.4 million, or $2.87 per unit, for the third quarter of 2008. EBITDA was $124.4 million, down from a company record $214.4 million in the year-ago period. Net income was $56.1 million, or $1.03 per unit, down from $141.3 million, or $2.60 per unit. Revenues totaled $1.25 billion, down from $1.825 billion .
“While third quarter 2009 earnings were lower than last year’s record third quarter primarily due to weaker asphalt margins, they were in line with our guidance and still represented the third best earnings in the partnership’s history,” said Curt Anastasio, CEO and President of each of the NuStars. “We were pleased with the strong performances from our fee-based storage and transportation segments, which partially offset the weaker relative performance from our asphalt and fuels marketing segment.”
The company’s DCF coverage equaled 1.06x in Q3 and 1.47x through the first nine months. NuStar said the DCF it generated so far this year from its non-asphalt operations totaled $246.9 million, which it said “more than covers the distribution payment” of $198.1 million for the nine months ended September 30th.
“In this difficult economy, we are fortunate to continue to benefit from our fee-based storage and transportation segments that generated a combined operating income of nearly $80 million, significantly higher than the $59 million generated in the third quarter of 2008 and the nearly $69 million generated in the second quarter of 2009,” Anastasio said.
Operating income from the company’s storage segment grew by 46% year over year, which the company credited to lease renewals at higher rates and new projects completed in the last year.
The pipeline segment’s operating income grew by 22%. Volumes on the company’s pipelines were lower due to the sale of some low-performance assets, as well as outages at some of the refineries its pipelines serve. The company’s revenue per-barrel and operating income increased largely due to a 7.6% increase in the tariff, which took effect on July 1st. Cheaper electricity also helped to lower operating costs.
NuStar said it expects to see a sequential improvement in Q4 throughput in its transportation segment due to a lighter refinery maintenance schedule. Next year, the company said it expects transportation volumes to be slightly higher than 2009, excluding the impact from the sale of pipelines this year.
Management said it is currently budgeting for a 2010 tariff adjustment that will be around -2% lower than last year’s (so about a 5.6% increase) starting July 1st, 2010.
“We still expect to benefit from the higher 7.6% tariff increase during the first six months of 2010, and that should translate into a slightly higher tariff rate for calendar year 2010 versus calendar 2009,” Anastasio said.
The asphalt business, as the company pre-announced last month, struggled more than the company had expected entering the quarter.
“Results from our asphalt and fuels marketing segment were significantly lower compared to last year’s record when margins were among the highest in history at $16.44 per barrel,” Anastasio said. “As a result of soft demand, primarily due to the lack of federal stimulus construction work and weak private sector activity due to the sluggish economy, margins averaged $5.03 per barrel in the third quarter of 2009 as asphalt prices failed to keep pace with the nearly 60% run-up in crude oil prices.”
Segment operating income plunged to $28.1 million from $137.6 million. Anastasio noted that while the plunge in the per-barrel asphalt margin was significant, the $5.03 the company realized was still above historical averages, which only goes to show how off base oil prices were last summer.
The company had expected federal stimulus dollars to flow more quickly than they actually did and support sales, but Anastasio said the pace of that flow appears to be quickening. The difficulty for the company is that the winter is normally the slow period for the asphalt business as road repairs in the northern tier of the country grind to a halt due to the colder temperatures.
“Payments made for federal stimulus construction work have been ramping up recently to approximately $3 billion this year and we continue to believe that most of the approximately $27.5 billion available for projects will be spent in 2010 and 2011,” he said. “As we’ve said before, it is not a matter of if, but a matter of when this money will be spent, and we expect our asphalt operations will benefit from this spending.”
The company added that a wet summer in the Northeast, which is one of the company’s core asphalt markets, delayed the start of many of the road projects that state and local governments did initiate.
Looking ahead, Anastasio said he expects the company’s fee-based storage and transportation business will continue to perform well in Q4 but that the asphalt business will experience its normal seasonality, with margins and sales volumes both declining sequentially.
“Higher throughputs as a result of a lighter refinery maintenance schedule should bode well for our transportation segment, while our storage segment will continue to benefit from higher renewal rates and previously completed projects,” he said. “Based on our current forecast, we expect the partnership’s fourth quarter 2009 EBITDA to be in the range of $80 to $100 million.”
BMR Take: Given that management pre-announced last month that the asphalt business wasn’t getting the lift it had expected from the federal government’s stimulus spending, there wasn’t much surprising in today’s releases. We knew that the company’s fee-based businesses were performing well and that the July 1st tariff increase would provide a nice tailwind for the pipeline business that should last into next year. The federal stimulus is slow to arrive, but the key point is that it is still expected to arrive and NuStar will win its share of those dollars. Cash flows are more than sufficient to cover the company’s slightly higher distributions. All in all, as we said last month, we remain comfortable holding either NuStar Energy or NuStar GP Holdings.
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