San Antonio-based publicly traded partnership NuStar Energy L.P. (NS) announced weak fourth quarter profits, hamstrung by lower margins in its asphalt and fuels marketing business.

The owner and operator of crude oil and refined products pipelines and storage facilities reported earnings per unit (EPU) of 30 cents, well below the Zacks Consensus Estimate of 41 cents and also lagging the year-ago profit of 65 cents.

However, revenue of $1,927.1 million surpassed our expectation of $1,187.0 million and was 61.4% above the year-earlier level, as product sales jumped 73.0%.

Quarterly Distribution

NuStar announced a quarterly distribution of $1.095 per unit ($4.38 per unit annualized), representing a 1.9% increase over the year-earlier quarter and equal to the third quarter 2011 distribution. The new distribution is payable on February 10 to unitholders of record as on February 7, 2012.

Distributable cash flow (DCF) available to limited partners for the fourth quarter was $63.1 million or 95 cents per unit (providing 0.87x distribution coverage), compared with $66.7 million or $1.03 per unit in the year-earlier quarter.

Segmental Performance

Transportation: Quarterly throughput volumes in the Transportation segment were down 1.3% year over year to 862,717 barrels per day. The decline can be attributed to lower crude oil and refined products pipeline throughputs on the back of turnaround activity at some of NuStar’s customers’ refineries as well as the effect of competitive supply economics.

However, these factors were more than offset by higher pipeline revenues as a result of tariff adjustment and additional sales generated by the Eagle Ford shale projects. As a result, segment operating income increased slightly (by 0.6%) year over year to $42.8 million. Operating revenue was up 2.2% to $85.0 million.

Storage: Throughput volumes in the Storage segment rose 8.5% year over year to 735,521 barrels per day. Revenues increased approximately 11.5% to $148.6 million on the back of an 11.4% hike in the storage lease revenue.

Quarterly operating income reached $53.1 million (up 11.6% year-over-year), driven by higher rates on the existing contracts, increased customer demand for storage services and contributions from NuStar’s recent acquisitions/project completions.

Asphalt and Fuels Marketing: As a result of weak asphalt margins and muted demand, the Asphalt and Fuels Marketing segment recorded weak performance compared with the year-earlier quarter. The unit reported operating loss of $12.5 million, as against the profit of $15.7 million achieved during the fourth quarter of 2010.

First Quarter Outlook

Going forward, the partnership anticipates its Storage unit to benefit from internal growth projects. However, the firm believes that transportation segment profitability will be comparable to the year-ago period. Finally, according to NuStar, its Asphalt and Fuels Marketing segment result is likely to be lower year over year and slightly negative.

Our Recommendation

NuStar Energy – which was spun off from U.S. refiner Valero Energy Corp. (VLO) in 2006 – has a Zacks #3 Rank (Hold rating) for the short run. We are also maintaining our long-term Neutral recommendation on the units.

The company is the fourth largest independent liquids terminal operator in the world and second largest in the U.S., apart from being the number one asphalt producer on the East Coast and number three asphalt producer in the U.S.

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