Description

     NSS preferred provides a stripped yield of 9.02% - nothing more. There is no magic here.

     NuStar Energy (NS) was created when Valero transferred pipeline and petroleum storage properties to the company and took it public public in 2002. A general partner was also created, NuStar Holdings (NSH) which owns 10.2 mil shares of NS, a 2% GP interest in NS and an IDR which is entitled to 23% of the income NS distributes in excess of $2.64 a share. Valero's chairman, William A. Greehey, became chairman of NS and NSH at their founding. He owns 3.48 mil shares (3.7%) of NS and 9.18 mil shares (21.4%) of NSH. Since his financial interest is more aligned with NSH, NS long paid a dividend $4.38 to its shareholders. This level of payment resulted in IDR payments from NS to NSH of about $45 mil a year. It also had the result of stripping NS of cash to protect and grow its businesses. In February, NS and NSH announced a merger which will eliminate the IDR. The terms were not adverse to Mr. Greehey. At the same time, NS announced that its dividend would be reduced from $4.38 to $2.40. The shares of NS declined sharply and now trade at $20.72. Jessie 993 wrote NS up on 1/5/09 at $44.37, while hawkeye901 wrote it up on 8/5/13 at $43.47, and rookie964 wrote it up at $61.70 on 10/19/14. All of these provide useful information on the company's properties. NSH ($11.45) was written up as a short by plainview on 6/7/13 at $26.32, and it is worth reading also.

     Over the past several years, NS has been a modest acquire r of pipeline and storage properties, and a modest builder of expansion projects onto their existing operations. NS owns some pretty good assets and these produce pretty good cash flows. Recently, a few problems have developed. NS owns a 14.4 mil bbls storage facility on St. Eustatius in the Caribbean which was badly damaged in the hurricane of 2017, and the facility's major client is PDVSA which is a slow payor and might be subject to US sanctions. In addition, NS's has pipeline assets in the Eagle Ford which are experiencing competition and the run-off of older higher-rate contracts. Overall, NS's years of under-investment are beginning to catch up with it. In response, late in 2017, NS bought Navigator Energy Services for $1.5 bil. Navigator has long-term fixed-fee contracts with Permian producers to gather, store and transport crude. While the acquisition appears to be reasonable, cash flow out of the property has been delayed and add-on investments have been required. Hence the dividend cut and the decline in NS's share price.

     I had hoped to find that NS's common was attractive after its decline. However, it is still highly leveraged. In the company's February 8th "Simplification and Financial Repositioning" paper, NS sets forth its business projections through 2020. If all goes well, NS will be trading at 9 times EBITDA by year-end 2019, and 8.2 times in 2020. As a consequence, I do not find the common attractive, though others might. There is, however, one issue in NS's balance sheet that does appear attractive - the NuStar Logistics 7.625% Fixed-to Floating rate Subordinated Notes due 1/15/2043. These notes were issued in 2013, are listed, and trade as baby bonds in $25 units. They are guaranteed on a subordinated basis to all senior and secured debt. NS may defer interest on the notes for up to five consecutive years. However, unlike preferred shares, any deferred payments accrue interest at the notes prevailing rate. Last, NS cannot make any distributions to any equity securities so long as these notes have not been brought current.

     At 12/31/17, NS had $3.2 bil of debt outstanding ranking ahead of the 7.625% notes against $670 mil of adjusted EBITDA for 4.8 times leverage. In addition, there is $784 mil of straight preferred stock beneath the 7.625% issue and $1.9 bil of equity at $20.72 a share, so there is a nice cushion.

     The 7.625% issue resets every three months to a rate of LIBOR plus 6.734%. For the period 1/15/18 to 4/15/18, the rate was 8.45419%. The new reset rate is 9.08169% through 7/15.

     The company has not been brilliantly run and might not be in the future.

Catalyst

     The company's three issues of straight preferred stock are not cheaper on a call basis than this issue, so I do not believe that they will be refinanced ahead of them. The company's debt issues yield less than these. If the business does well, this issue might be a candidate to be refinanced. 

     ETE offered $14.70 in cash for NSH so they appear to believe in the assets. If ETE bought the entire complex, it would it refinance more cheaply.

     Greehey is 81.

     Until then, an investor gets a 9% coupon and more if LIBOR increases.