We are maintaining a Neutral rating on NuStar Energy, L.P. (NS) shares based on its strong asset base and high product sales, partially offset by dull fourth quarter 2011 results.

NuStar Energy, a master limited partnership (MLP), boasts of a diversified asset base and robust distribution-growth prospects. A strong pipeline of organic growth projects and contribution from acquisitions provide the partnership with an above peer-group average distribution coverage ratio.

During 2011, NuStar burnt up approximately $200 million for the completion of 16 internal growth projects that are expected to be highly beneficial and heavy contributors to the business segments this year. The company started operating two pipelines in the Eagle Ford Shale and finished working on the St. James, Louisiana Phase I terminal expansion project. With an enhanced storage capacity of 8.2 million barrels, this will be NuStar’s second largest storage terminal asset.

Looking ahead, we expect to see NuStar investing substantially in highway improvement projects. Moreover, a large amount of stimulus funds (from the American Recovery and Revitalization Act) is still left to be spent at the state and municipal levels. This is expected to improve the company’s performance in the coming months.

However, our optimism is somewhat clouded by NuStar’s weak performance in the last three months of 2011, hamstrung by lower margins in its asphalt and fuels marketing business. Even throughput volumes in the Transportation segment declined year over year.

We believe that the addition of the new asphalt business has increased the partnership’s exposure to volatility in commodity prices. Coupled with the inherent seasonality of the road construction business, this increases the partnership’s risk profile. As such, NuStar is no longer a pristine midstream MLP focused entirely on fee-based and relatively low risk infrastructure assets.

Additionally, unfavorable regulatory changes by the Federal Energy Regulatory Commission (FERC) would impact the partnership’s results. This will also contribute to increased borrowing costs and depress the market value of its limited partner units.

NuStar Energy, which was spun off from the U.S. refiner Valero Energy Corp. (VLO) in 2006, has a Zacks #3 Rank (Hold rating) for the short run.

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