San Antonio-based publicly traded partnership NuStar Energy L.P. (NS) announced strong second quarter results, driven by higher operating income from the 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 $1.34 (excluding the effect of special items), comfortably surpassing the Zacks Consensus Estimate of $1.10 and the year-ago profit of $1.13.
Revenue of $1,589.2 million surpassed our expectation of $1,273.0 million and was 41.3% above the year-earlier level.
Quarterly Distribution
NuStar announced a quarterly distribution of $1.095 per unit ($4.38 per unit annualized), representing a 2.8% increase over the year-earlier quarter and 1.9% above the first quarter 2011 distribution. The new distribution is payable on August 12 to unitholders of record as on August 9, 2011. Distributable cash flow (DCF) available to limited partners for the second quarter was $119.4 million or $1.85 per unit (providing 1.69x distribution coverage), compared with $107.2 million or $1.72 per unit in the year-earlier quarter.
Segmental Performance
Transportation: Quarterly throughput volumes in the Transportation segment were down 15.8% year over year to 785,551 barrels per day. The decline can be attributed to lower crude oil and refined products pipeline throughputs on the back of unplanned maintenance activity at one of NuStar’s customer’s refineries and the effect of competitive supply economics. As a result, segment operating income decreased 13.2% year over year to $30.2 million, also pulled down by the July 1, 2010 negative tariff adjustment. Operating revenue was down 7.0% to $71.6 million.
Storage: Throughput volumes in the Storage segment rose 1.3% year over year to 693,781 barrels per day. Revenues increased approximately 8.3% to $139.5 million on the back of a 9.4% hike in the storage lease revenue. Quarterly operating income reached $42.8 million (flat year-over-year), as higher rates on the existing contracts, increased customer demand for storage services and contributions from NuStar’s recent acquisitions/project completions were offset by a one-time non-cash write-off.
Asphalt and Fuels Marketing: As a result of robust winter field economics, price hikes, and a tight asphalt supply dynamics, the Asphalt and Fuels Marketing segment recorded much better performance compared with the year-earlier quarter. Segment operating income, at $72.2 million, was significantly higher than the profit of $47.6 million achieved during the second quarter of 2010.
Third Quarter Guidance
According to the partnership, earnings per unit during the September quarter are likely to be in the range of 50 cents to 70 cents.
Outlook
NuStar’s management expects 2011 earnings and DCF to be higher than last year.
Going forward, NuStar anticipates its Storage unit to benefit from internal growth projects and recently completed acquisitions. However, the firm believes that transportation segment profitability will suffer due to reduced throughputs on the back of refinery turnaround activity.
Finally, according to NuStar, its Asphalt and Fuels Marketing segment is poised to gain from a full year’s contribution expected from the new U.S. heavy fuels and bunker fuels markets that the partnership entered in 2010.
Our Recommendation
NuStar Energy – which competes in the ‘Oil and Gas Production Pipeline’ industry with firms like Sunoco Logistics Partners L.P. (SXL) and Williams Partners L.P. (WPZ) – has a Zacks #3 Rank (Hold rating) in the short run. It 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.
