NuStar GP Holdings, LLC Earnings Remain Remarkably Stable

By Markets Fool.com

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NuStar GP Holding (NYSE: NSH) continues to deliver steady earnings during the oil market downturn, mainly due to the remarkable stability of its master limited partnershipNuStar Energy (NYSE: NS). That is not surprising considering that its only sources of income are the cash flow streams it receives from its MLP, which have remained stable because the company continues to maintain its current distribution level. That said, its MLP recently announced a large transaction, which could eventually put it in the position to increase its payout in the future.

NuStar results: The raw numbers

Metric

Q3 2016 Actuals

Q3 2015 Actuals

YOY Growth

Total cash distributions from NuStar Energy

$24.1 million

$24.1 million

(0.1%)

Distributable cash flow

$23.2 million

$22.8 million

1.8%

DCF per unit

$0.54

$0.53

1.9%

YOY = year over year. Data source: NuStar GP Holdings.

What happened with NuStar this quarter?

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NuStar's results continue to be virtually identical to those in the previous year:

  • NuStar GP's only source of income is its ownership interest in NuStar Energy, which continues to send it roughly $2 million for the general partner interest, $10.9 million from its incentive distribution rights, and $11.2 million for its limited partner interest. The first two were fractionally higher over the prior year, while the latter was down slightly leading to a minor dip in cash inflows.
  • The reason distributable cash flow increased was the result of a slight decrease in general and administrative expenses as well as an income tax benefit.
  • That small bump in distributable cash flow almost entirely covered the quarterly distribution of $0.545 per unit. Again, the company continues to maintain a slight shortfall, which it covers with incremental debt.
  • NuStar Energy, meanwhile, adequately covered its distribution, with it delivering 1.02 times coverage last quarter and full-year coverage of 1.08 times. That is a slight drop from last year when coverage was 1.05 times in the third quarter and 1.13 times forthe first nine months.

What management had to say

About the quarter, CEO Brad Barron said:

NuStar GP Holdings, LLC's third quarter results were positively impacted by NuStar Energy L.P.'s strong third quarter performance from its pipeline and storage operations.

Meanwhile, on the MLP's results, Barron said:

We continued to benefit from strong refined product pipeline throughput volumes during the third quarter. In addition, 1.8 million barrels of recently leased storage at our Piney Point, Maryland facility and higher revenues at some of our terminal locations contributed to solid results from our storage segment. These strong results from our base business, in combination with lower than expected operating expenses across all of our businesses during the quarter, allowed us to cover our distribution for the tenth consecutive quarter and we are on track to cover our distribution for a third consecutive year.

Three things are contributing to NuStar's stability during the current oil market downturn. First, it is shipping a lot of refined products on its pipelines because lower prices are fueling higher demand for motor fuels. Second, the company is storing more products because there is still a glut of oil on the market. Finally, it is cutting costs to offset weaknesses elsewhere, which is allowing it to generate more than enough cash flow to cover its payout.

Looking forward

After the quarter ended, NuStar Energy announced that it will purchase crude oil and refined product terminal assets from Martin Midstream Partners (NASDAQ: MMLP) for $93 million. That transaction will strengthen NuStar's key Corpus Christi hub while giving Martin Midstream the cash it needs to de-lever and ultimately return the company to growth mode. Meanwhile, the transaction is immediately accretive to NuStar's earnings, and it has upside growth potential. NuStar expects the deal to close this quarter, meaning it should boost earnings and the coverage ratio going forward.

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Matt DiLallo has no position in any stocks mentioned. The Motley Fool recommends NuStar GP. 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.