NuStar Energy L.P. (NS) – a master limited partnership (“MLP”) – announced significantly better-than-expected third quarter results, driven by robust throughputs on its crude, refined products and ammonia pipelines, together with improved asphalt margins in its Asphalt and Fuels Marketing segment.
The partnership reported earnings per unit (EPU) of 90 cents, comfortably ahead of the Zacks Consensus Estimate of 76 cents. Revenue of $1,138 million also surpassed our expectation of $1,088 million.
However, compared with the year-ago period, NuStar’s earnings per unit declined 12.6% (from $1.03 to 90 cents), as revenue fell 9.0% (from $1,251 million to $1,138 million).
Distribution Raised
NuStar raised its third quarter 2010 cash distribution to $1.075 per unit ($4.30 per unit annualized), representing an increase of approximately 0.9%, both sequentially and year over year. The new distribution is payable on November 5 to unitholders of record as on November 1, 2010. Distributable cash flow (DCF) available to limited partners for the third quarter was $84.0 million or $1.30 per unit (providing 1.21x distribution coverage), compared with $61.5 million or $1.13 per unit in the year-earlier quarter.
Transportation Segment
Quarterly throughput volumes in the Transportation segment were up 5.4% year over year to 909,670 barrels per day. The improvement can primarily be attributed to increased crude oil pipeline throughputs, higher throughputs on NuStar’s ammonia line, as well as favorable weather conditions in the Midwest.
Higher throughputs helped segmental revenues to increase 3.3% year over year to $80.6 million, despite tariff fall (1.3% decrease effective July 1, 2010). As a result, operating income increased 5.9% to $37.5 million, notwithstanding a 1.7% rise in operating expenses.
Storage Segment
Throughput volumes in the Storage segment fell 5.0% year over year to 673,121 barrels per day. However, revenues increased approximately 4.7% to $131.1 million, driven by a 6.3% increase in the storage lease revenue.
Quarterly operating income reached $45.6 million (3.6% year-over-year rise) due to new customer contracts, higher renewal rates on the existing contracts, increased customer demand for storage services, and contributions from NuStar’s recent acquisitions. These positive factors were partially offset by a 4.7% rise in segment operating expenses, stemming from the partnership’s decision last year to defer hiring and maintenance and repair at some of its facilities, besides higher expenses incurred as a result of the terminal acquisition at Mobile, Alabama.
Asphalt and Fuels Marketing
As a result of improved gross margins, the Asphalt and Fuels Marketing segment recorded increased profitability compared with the year-earlier quarter. Segment operating income, at $35.5 million, was $7.3 million higher than that incurred during the third quarter of 2009, reflecting tight asphalt supplies in the Northeast, higher light product margins, and increased sales volumes of higher-margin, polymer-modified and specialty-grade asphalts.
Fourth Quarter Guidance
According to the partnership, EBITDA during the December quarter is likely to be in the range of $110 million to $130 million. Operating expenses are expected to be around $120 million to $125 million, G&A expenses in the range of $27 million to $28 million, DD&A expenses in the $39 million to $40 million range, and interest expense of $19 million to $20 million.
Our Recommendation
NuStar units currently retain a Zacks #3 Rank, which translates into a short-term Hold rating. We are also maintaining our long-term Neutral recommendation on the stock.
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