We are upgrading NuStar Energy L.P. (NS) units to “Neutral” from “Underperform”, reflecting a favorable outlook for its asphalt business.
We believe that the partnership will be able to compensate for its first quarter 2010 miss by way of strong performance in its Asphalt and Fuels marketing segment in the second and third quarters. The outlook for the asphalt business remains favorable, given the commodity’s tightening supply and demand fundamentals in the U.S. market. NuStar also expects to see a significant uptick in spending on highway improvement projects as the paving and resurfacing season gets underway. Moreover, large amounts of stimulus funds (from the American Recovery and Revitalization Act) are still left to be spent at the state and municipality levels. This is expected to drive profitability in NuStar’s Asphalt and Fuels marketing segment. 
(Read our full coverage on NuStar’s first quarter 2010 results: NuStar Misses Big) 
We also like NuStar’s recently announced Asphalt Holdings acquisition, which will add to its already attractive set of fee-based assets in the U.S., besides being immediately accretive to the partnership’s cash flow. A diversified asset base and robust distribution-growth prospects are other positives in the NuStar story. 
However, we believe that these factors are already reflected in its current valuation and do not foresee much upside from this level. We also remain wary of the higher business risk associated with the partnership’s more volatile asphalt operations. As such, we see NuStar units performing in line with the broader market. 
San Antonio, Texas-based NuStar Energy is a master limited partnership that engages in the transportation and storage of crude oil as well as refined products in the U.S., the Netherlands Antilles, Canada, Mexico, the Netherlands and the U.K. The partnership is one of the largest asphalt refiners and marketers in the U.S. and the second largest independent liquids terminal operator in the nation. NuStar’s current asset base includes 8,417 miles of pipelines, 89 storage facilities, and 2 asphalt refineries with a combined throughput capacity of 104,000 barrels per day. The partnership’s combined system has more than 93 million barrels of storage capacity.

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