On Dec 26, 2014, we issued an updated research report on NuStar Energy, L.P. (NS). The San Antonio-based publicly traded partnership has reported strong results in the past three quarters and expects a year-over-year improvement in fourth-quarter earnings. However, considering the weakness in oil prices, the demand for their transportation and storage services are likely to get hampered, thus affecting earnings. Moreover, high debt levels increases concern.
These factors are reflected in NuStar’s current Zacks Rank #3 (Hold), implying that it is expected to perform in line with the broader U.S. equity market in the next one to three months.
During its third-quarter results, NuStar has stated that it expects a year-over-year growth in its fourth quarter earnings. It projects higher earnings from the pipeline segment, which comprises a major portion of the partnership’s earnings.
Moreover, Nustar continues its focus on organic growth. The partnership anticipates investments of $330-$350 million in 2014, which should further improve earnings in the upcoming quarters. The highlight of the investment continues to be the Pipeline segment. In Oct, the partnership entered a joint venture agreement with the Mexican state-owned petroleum company Pemex to develop pipeline infrastructure assets, which when operational should be accretive to the earnings of both the parties.
However, the demand for transportation and storage services are directly linked to the price of the underlying commodities – oil and natural gas. With weak oil prices and upstream firms reducing their expenditure on exploration activities, the demand for such services is likely to be impacted significantly, hurting earnings.
We also remain concerned about NuStar’s high debt levels – representing a debt-to-capitalization ratio of 61% – that leave the partnership vulnerable to an extended downturn.
Key Picks in the Energy Sector
Despite weak outlook in the energy sector, some companies with better Zacks Rank are likely to outperform the broader U.S. market in the next one to three months. These include the stocks of Spectra Energy Partners, LP (SEP), Atlas Pipeline Partners, L.P. (APL) and Magellan Midstream Partners LP (MMP). While Spectra Energy sports a Zacks Rank #1 (Strong Buy), Atlas Pipeline and Magellan Midstream hold a Zacks Rank #2 (Buy).
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