This earnings season, NuStar Energy Partners LP (NYSE: NS)—a name that we’ve rated a Sell for some time and highlighted as a stock to avoid after the MLP Association’s 2017 Investor Conference—finally acknowledged reality, announcing a transaction to buy out NuStar GP Holdings LLC (NYSE: NSH) for a 1.7 percent premium and slashing its distribution by 45 percent.
Although management attributed this painful decision to a “change” in market sentiment that penalized NuStar Energy for its coverage shortfalls and high leverage, the reality is that the partnership’s struggles date back to the previous management team, which got burned by investments in refineries and asphalt terminals.
Their replacements compounded the problem by failing to execute organic growth projects—will the long-awaited NGL (natural gas liquids) with Petroleos Mexicanos ever come to fruition?—and massively overpaying for the Navigator oil-gathering system in the Midland Basin.
The latter transaction involved the issuance of 14.4 million new common units, $385 million worth of preferred units and $550 million worth of bonds, decimating NuStar Energy’s already thin coverage ratio. Once again, it’s easy to overpay for an asset when you know your stock is overvalued and that a distribution cut is inevitable.
Whenever an MLP finally takes its medicine, readers always want to know if it’s time to buy the fallen angel—a fair question.
Teekay LNG Partners LP (NYSE: TGP), which generated a total return of more than 40 percent last year, sold off hard in 2016 after slashing its payout by 80 percent to shore up its balance sheet and fund growth projects.
Through the end of 2018, the partnership will take delivery of more than 11 LNG carriers; these vessels are expected to contribute about $160 million in annual operating cash flow, improving the shipowner’s leverage metrics and setting the stage for at least a partial restoration of its payout.
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Elliott and Roger on Mar. 25, 2021
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