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Takeover Talk in the MLP Space

By Roger S. Conrad on Jun. 17, 2014

After an extended period of weakness and some dubious investment decisions by its former management team, NuStar Energy LP (NYSE: NS) posted first-quarter results that rekindled our interest in the MLP’s turnaround story.

The ailing partnership generated distributable cash flow of about $1.00 per unit, exceeding management’s guidance for between $0.85 and $0.95 per unit and covering 91 percent of the payout. Management reiterated its near-term goal of generating enough cash flow to fund the distribution by year-end.

As part of its strategic shift, NuStar Energy has divested its interest in cyclical businesses in favor of organic expansion projects at its South Texas pipeline system, which supports customers in the prolific Eagle Ford Shale.

This turnaround effort involved the divestment of the MLP’s ownership interest in the San Antonio refinery and its exit from the much-maligned asphalt business.

In late 2012, NuStar Energy accelerated its growth opportunities in the Eagle Ford Shale with the $325 million acquisition of crude-oil and NGL pipelines and related storage and gathering assets from privately held TexStar Midstream Services LP.

The MLP in the second quarter completed its first expansion to its South Texas pipeline system, bringing the capacity to 135,000 barrels per day. Management expects to complete the second phase, which will increase the capacity to 200,000 barrels per day, in the first quarter of 2015.

NuStar Energy also more than tripled the capacity of its docks in Corpus Christi, enabling customers to move crude-oil volumes across the Gulf of Mexico to refineries in Louisiana.

We also like the MLP’s recently announced agreement with Model Portfolio holding Occidental Petroleum Corp (NYSE: OXY) to reactivate and reverse an idled pipeline that will transport NGLs to the oil and gas company’s propane export facility in Ingleside, Texas. NuStar Energy expects this project to come onstream in the second quarter of 2015.

At the National Association of Publicly Traded Partnership’s (NAPTP) annual MLP investor conference, management indicated that it would continue to focus on organic growth opportunities afforded by its existing asset base while eyeing complementary acquisitions in the Eagle Ford Shale.

CEO Bradley Barron mentioned the Niobrara Shale in the Rockies as a basin that the MLP would consider entering.

But the progress in NuStar Energy’s pipeline segment must overcome near-term weakness in its terminal segment, where a crude-oil market in contango–spot prices are lower than volumes for future delivery–has weighed on demand from traders.

In particular, management highlighted weakness at its West Coast facilities and reduced profit sharing at its terminals in St. James, La., because of the tightening spread between Light Louisiana Sweet crude oil and West Texas Intermediate.

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