NuStar: Some Potential In This Liquids-Focused MLP - NuStar Energy L.P. (NYSE:NS)

The company is one of the few with refined pipelines heading into Mexico, which positions it to take advantage of the growing shortage of products in that nation.

As some of you may recall, a few times in the past we have discussed a very high-yielding oil-focused midstream partnership called NuStar Energy L.P. (NS). On Thursday, May 16, 2019, this company gave a presentation at the MLP & Energy Infrastructure Conference, and it has seen a few more positive developments since that time. As such, I thought it would be a good idea to revisit the company as we continue to seek out those high-yielding energy companies that could be good ways for us to generate income.

NuStar Energy is a midsized midstream master limited partnership that primarily services oil producers. As such, the company's operations mostly center around the major oil-producing basins in the continental United States such as the Permian and Williston basins:

NuStar Energy currently has 9,800 miles of pipelines capable of transporting approximately 1.5 million barrels of liquids per day. The company also has storage facilities capable of handling 88 million barrels. We can also see in the map above that the company has a handful of refined products terminals capable of handling a total of 365,000 barrels of products.

One of the nice things about the company's network is the fact that it is present in both the Permian and Midland basins, which are two of the oil-producing regions that are seeing some of the fastest upstream production growth in the country. Of course, these are not the only regions that are seeing upstream production growth. In fact, as we can see here, all of the various oil shale regions in the country have seen tremendous production growth over the past few years, and this trend is expected to continue over the next few years:

Of course, NuStar Energy itself does not actually produce any oil itself. Instead, the company benefits from this upstream growth because it results in more oil being transported away from the basins and to the market where it can be sold. As we have discussed before, the basic business model used by midstream companies results in growing revenues and cash flows whenever their transported volumes increase. Thus, we can clearly see how the growth in upstream production should benefit NuStar Energy.

Of course, pipelines and other midstream infrastructure have a limited amount of resources that they can handle. Thus, in order to truly take advantage of the growing potential throughput volumes, midstream companies will need to add more capacity to their systems. NuStar Energy is doing just this as it has been steadily increasing the capacity of its intra-basin pipeline network in the Permian basin. Indeed, the company's additions to this system have resulted in it managing to see its capacity increase faster than the basin's production has grown:

This growth in the capacity of the company's intra-Permian system has generally allowed it to take advantage of the production growth. As we can see here, the amount of liquids being transported by the system has risen over the past two years. This has mostly led to growing EBITDA from the system over the same period:

This sort of growth is certainly the kind of thing that we like to see as it shows how companies in the midstream space have been benefiting from the shale oil boom. It is also certainly nice to see that NuStar Energy has been able to deliver this kind of growth despite the fact that it is not directly impacted by commodity prices. Indeed, the company has relatively no exposure to commodity prices, which is certainly nice for those investors that are just looking for a steady stream of income rather than a speculation on commodity prices.

As we have discussed in previous articles on NuStar Energy, the company is one of the few midstream companies that has pipelines crossing over the border into the nation of Mexico. This presents NuStar with an opportunity due to the fact that Mexico, while an oil-rich nation, is suffering from a shortage of refined products. This is due to the fact that weak returns and historical under-investment have caused Mexican refineries to operate at an incredibly low 30% of nameplate capacity. This is down from the much higher levels at which they used to operate, which has caused their output of both gasoline and diesel fuel to decline.

However, the demand for these two types of fuel from the Mexican consumer and industrial sectors has not declined nearly to the same degree. This has led to a shortage of these products that the nation has had to depend on imports to address. Back in 2015, that shortage was around 520,000 barrels per day. It is estimated that it will increase to 865,000 barrels per day this year. This shortage has resulted in the exports of refined products from the United States to Mexico growing over time:

This is a situation that is not expected to change anytime soon. As NuStar Energy is one of the few midstream companies with pipelines going into Mexico, it is seeking to take advantage of this by increasing the quantity of products that it ships south of the border. In order to do this, the company is constructing new pipelines to feed the area. The first of these is an expansion to the Valley pipeline that runs from Corpus Christi, TX, down to Edinburg, TX, and ultimately downward to Matamoros. Currently, the second half of the pipeline is only 8 inches in diameter, and to increase the capacity, NuStar Energy is adding a new 12-inch loop to this portion. In addition, a new receiving facility for the refined products is being constructed in Matamoros and is expected to operational later this year.

As second project that NuStar Energy is working on is to expand its export capability is the Nuevo Laredo project. This is something that the company is working on for Valero (VLO), which also means that it has a customer that will be using the pipelines (and thus providing a source of revenue from them) once the construction is complete. NuStar Energy reports that the sub-projects that make up this project (the Odem pipeline, Dos Laredos pipeline, and Nuevo Laredo expansion) should be completed by February 2020.

As this project is expected to be completed in February of 2020, we should expect it to begin generating revenues for the company at around that time. This is the second of the company's major Mexican export projects to come online, so clearly we should see the full financial impact of all of its current Mexican opportunities by the middle of next year.

NuStar did point out a few more growth opportunities in its presentation, such as greater demand for storage as a result of IMO 2020 (the low-sulfur fuel requirement for ocean-going vessels), but for the most part, these are fairly minor compared to the growth opportunities that we have just discussed. Therefore, let us have a look at the company's financial condition as this has been my biggest problem with it in the past.

First, let us have a look at NuStar Energy's capital structure. The general way to do this is looking at the company's debt-to-equity ratio. This can help us see if a company is relying too heavily on debt to fund its operations, although it is admittedly not as good of an indicator as some other measures. As of March 31, 2019, NuStar Energy had a total of $3.343 billion in total debt, which compares to $2.457 billion in partners' equity as of the same date. This would give the company a debt-to-equity ratio of 1.36. I generally prefer to see this ratio at less than 1.0, so this could be an indicator that NuStar Energy is using too much debt to finance its operations, which could be a risk in the event of an industry downturn or other adverse conditions.

Perhaps more important than the raw level of debt though is the company's ability to carry its debt. The most accurate way to judge this is by looking at the company's debt-to-EBITDA ratio, which tells us roughly how long it will take to pay off its debt if it devotes all of its pre-tax cash flow to this purpose. Ideally, we want to see this ratio at less than 4.0x to provide a margin of safety, but there are many companies in the industry that operate with this ratio at 4.0-5.0x. For its part, NuStar Energy has a debt-to-EBITDA ratio of 4.1x based on the company's most recent results. This is certainly a reasonable ratio that indicates that NuStar Energy should have no real difficulty carrying its debt, even if the ratio is not as low as I would strictly like to see. It is reasonably close to this level, though.

NuStar Energy currently boasts a very impressive 9.16% distribution yield. As is always the case though, it is critical for us to make sure that the company can actually afford the distribution that it pays out. The usual way to do this is by having a look at the company's distributable cash flow, which is a non-GAAP measure that theoretically tells us the amount of cash that was generated by the company's ordinary operations that can be paid out to the common unitholders. In the first quarter of 2019, this figure was $95.051 million, up from the $91.732 million that it had in the prior year quarter. As of the end of the first quarter, NuStar Energy had 107,531,619 weighted average units outstanding, so its currently $0.60 per unit quarterly distribution will cost the company approximately $64.52 million. This gives the company a distribution coverage ratio of 1.47. NuStar Energy thus appears to be more than capable of covering its distribution at the present level with a significant margin of safety. This is certainly nice to see.

In conclusion, NuStar Energy is an oil-focused midstream partnership that is fairly well-positioned to take advantage of the growing amount of production coming out of the nation's various basins. NuStar Energy is also one of the few midstream companies that is actively exporting refined products to Mexico, which could prove to be a significant opportunity for it. The company appears to be quite well-financed, although its debt load is still a bit higher than I would really like to see. Nonetheless, we do not see enough oil-focused midstream companies, so this one might be worth considering for diversification purposes.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This article was originally shared with subscribers to Energy Profits in Dividends on June 19, 2019.

Source: Seekingalpha.com

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