3 Key Takeaways From NuStar Energy's Q2 Earnings

By Markets Fool.com

IMAGE SOURCE: NUSTAR ENERGY.

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NuStar Energy (NYSE: NS) reported second-quarter net income of $40 million, compared with $42 million from the same quarter last year. Year over year, though, NuStar's first-half net income of $84 million was down over 46% from the first half of 2015, when the company's earnings were $157 million. Here are three key takeaways from NuStar's second-quarter earnings for investors looking at the company as a long-term investment.

Positive earnings

Although the total first-half earnings were considerably lower than in 2015, we have to consider the operational environment. In the same period in 2015, oil prices were considerably higher and large amounts of crude oil from regions such as the Eagle Ford play in Texas were being funneled through NuStar's array of pipes and storage facilities. With lower prices, less crude was produced, causing NuStar's throughput to drop about 25% that led to revenues that were were only slightly above contract minimums. This was slightly offset by moving higher amounts of refined products as well as a significant drop in the cost of product sales. Year over year, product sales and associated costs both dropped nearly 50%, which is why operating income declines weren't nearly as steep as revenue declines.

According to NuStar President and CEO Brad Barron, "Strong refined product pipeline throughput volumes, the benefit from 1.1 million barrels of storage leased at our Piney Point, Md., facility, along with lower-than-expected operating expenses, contributed to our better-than-expected second-quarter results."

That's an important point to remember. Despite the challenging oil market, the company still managed to turn a profit and even increased its distributable cash flow from a year ago.

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Distribution is covered

NuStar's distributable cash flow from operations not only remained positive at $92 million, but it also covered its $85 million second-quarter distribution. For the first half, the distributable cash flow of $190 million more than covered the $170 in distributions. NuStar expects this trend to continue for the remainder of 2016, which should be a source of confidence for investors.

Additionally, the company's wide network of pipelines and storage facilities throughout the world provides several sources of potential cash flow to help offset losses. We saw this in the second quarter, as crude throughput dropped but refined throughput increased when compared with a year ago. This diversification is prominent in its earnings report, as its operating income from its pipeline business was $63 million, while the operating income from its storage facilities was a comparable $51 million.

NuStar has several projects under way that will be complete by the end of 2017 that will provide additional cash flow. These projects include the expansion of some of its West Coast terminal facilities and a new pipeline into Mexico.

Trouble around the corner

Of course, expanding and improving these facilities costs money. NuStar is planning about $200 million in strategic spending in 2016. The Mexico pipeline was going to cost an additional $135 million before it got delayed for a year.

Additionally, NuStar faces its first long-term debt maturities in 2018. While the two-year reprieve before it has to pay back debts is highly beneficial during the difficult environment, it's looking at $802 million in required payments in 2018. Between 2018 and 2043, NuStar has $3.2 billion in total debt maturities. That $3.2 billion in debt equates to a very high 68% debt-to-capitalization ratio.

While it's a source of confidence that NuStar will cover its short-term distributions, $40 million in net income won't suffice for its long-term plans. The company needs to generate increases in cash flows and net income by the end of 2017 to cover its long-term expenses or will need to refinance and potentially assume additional debt. That will be largely driven by higher oil prices, which is out of the company's control.

Continuing to drive lower operating costs while generating new cash flows from its projects under development will be a good first step in creating long-term investor confidence.

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David Lettis has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.