Économie

At 13% Yield, With Steady Payouts

At 13% Yield, With Steady Payouts

Looking for a high yield contrarian play? Maybe you should consider NuStar GP Holdings LLC ( NSH ), the General Partner of NuStar Energy LP ( NS ), which preferred units we wrote about in a recent article . Want to see an ugly chart? Take a gander at this one: NSH seriously underperformed the benchmark Alerian MLP ETF ( AMLP ) the past year and quarter. But, like many other energy-related companies, has had a resurgence over the past month – it’s up 13.61% since mid-December ’17: Profile: NuStar GP Holdings, LLC owns a general partner and limited partner interests in NuStar Energy LP which engages in the transportation of petroleum products and anhydrous ammonia, the terminaling, and storage of petroleum products and the marketing of petroleum products. It holds a 2% general partner interest, 11.0% limited partner interest, and 100% of the incentive distribution in NuStar Energy LP. The company, through NuStar Energy LP, has a market share of approximately 8,700 miles of crude oil and a refined product pipeline. The company has operations in the US, Canada, Mexico, The Netherlands, including St. Eustatius in the Caribbean, and the UK. NuStar GP Holdings, LLC was founded in 2000 and is based in San Antonio, Texas. (Both companies share the same management.)
(Source: NSH website) What’s Going On: This excerpt from last week’s article on NSH and NS: “On May 4, NS Acquired the Permian Crude System from First Reserve Energy Infrastructure Fund for ~ $ 1.5 trillion in cash.” “As you may have heard, the Permian Basin has been one of the most prolific producing areas in the US. 40% of all US onshore rig activities are based in the Midland Basin, the core of the Permian, and provide NS growth, through increasing volume of existing producers, bolt-on acquisitions, and larger takeaway capacity opportunities, based on long-term, fee-based contracts. Even though the new acquisition promises good growth for NS, the problem is that management is paying a high price for these assets – more than ~ 20 times 2017 the assets’ pro-rated EBITDA. This high acquisition price has been reduced to 2017, in the second quarter, down to .59x in Q2 ’17, and to .66x in Q3 ’17. Investors have been concerned that NS may have to cut its common distribution, and NS’s common units fell by ~ 40% in 2017. ” Basically, NS’s management makes the decision to make a sacrifice. distributions: Subsequently, the nagging question for both NSH and NS has not been discussed. NSH receives a combination of GP Interest and $ IDR, which totaled $ 41.68M in Q1-3 ’17, and also receives distributions for the NS common units it owns – it received $ 33,555M in Q1-3 ’17. Here’s the breakdown of the distribution which NSH has received from NS in so far in 2017:
(Source: NSH Q3 ’17 10Q) In turn, NSH has paid out ~ 98% of the $ received unitholders over the past four quarters: NSH’s current distribution coverage / unit was 1.02x over the past four quarters: This was a bit higher than the previous four quarters, when it had a coverage factor of .98x: Why are we accepting just 1.02X distribution coverage? Because GPs like NSH have a different business model than the actual pipeline companies. It’s vastly simpler – they take in their GPs, as well as their common LPs. They have very little debt, no machinery to maintain, etc. (Source: NSH Q3 ’17 release)
Guidance – NS is guiding to $ 100M more in EBITDA in 2018 – a range of $ 675-725M, which is an increase of about $ 100M, ~ 17% in total EBITDA NS’s forecasted 2017 EBITDA. “The increase is mostly attributable to incremental EBITDA expected from a full-year benefit and an increase in EBITDA from other projects and expected new turnarounds at our customer refineries next year.” (Source: Q3 ’17 earnings call ) (Source: NS website) Since NS gives 2018 EBITDA guidance, we looked at the% s of NS’s EBITDA which NSH has received from NS for the past four quarters – it was 17.99%: Based on NS ‘s EBITDA guidance, NSH’ s distributions look secure for 2018. In fact, there’s $ 25.51 to $ 34.51 implied to increase in total distributions to NSH, if that 18% holds. Even if NS only meets its low end EBITDA guidance figures, it still gives NSH a 26% cushion. Their $ 95.99M distributions received from NS over the past four quarters. On the Q3 ’17 earnings call, CEO Barron detailed the $ 22M IDR reduction that NSH accepted: “NuStar Energy L.P.’s acquisition of Navigator, NuStar GP Holdings, LLC agreed to date the Incentive Distribution Rights, or IDRs, to which it would otherwise be entitled for any NuStar Energy L.P. Common Equity that will be issued from the date the acquisition agreement was signed and through the 10 quarters thereafter, which begins with the distribution for the second quarter of 2017. The waiver is capped at $ 22 million. ”
On 4/18/17, NS issued 14.4 million common units with gross proceeds of approximately $ 665 million to help fund the Permian acquisition. Management then closed the Permian deal on 5/4/17. The $ 22M IDR waiver ends as of Q4 ’19. So, moving forward, even if NSH does not fully participate in any IDR, it should still be able to be paid for. NSH country in a Feb / May / Aug / Nov cycle and should go ex-dividend around 2/6/18. This is not a dividend growth story – they’ve been holding their quarterly distribution at $ .545 since October 2012. They’re at K-1 at tax time. NSH currently ranks as the top yielding vehicle in the Energy table section of our High Dividend Stocks By Sectors Tables . earnings: NSH has had mainly flat figures over the past four quarters. DCF rose a bit, at 4.21%, which was raised the coverage / unit 4.17%, since the unit count was almost flat. options: If you’re just moderately bullish, but you still want to stick your toe in the water, NSH’s price / unit. We added this June trade to our Cash Secured Puts Table , where you can see more details for this trade and over 30 other trades that we update each day. The June $ 15.00 put strike currently $ 1.05, just below the $ 1.09 in distributions that NSH will pay in February and May, and gives you a breakeven of $ 13.95, just 3.3% above NSH’s 52-week low. (Note – put sellers do not receive distributions – we only include them in our Put options for premium option.)
If you’re feeling more bullish, but you want to hedge your bet, Covered Calls Table , which also has 30 other trades. The June $ 17.50 call strike pays $ .65, and is $ .80 above NSH’s $ 16.70 price / unit. In a static scenario, you’d keep your NSH units, and collect the two dividends and the money option, for a total of $ 1.74. In an assigned scenario – if your NSH units get allotted / called before or ex-dividend dates, you’d have the $ .65 in money option, and an $ .80 / unit capital gain, for a total of $ 1.45. The third profitable scenario shown here is where your NSH units would not get assigned until after the ex-dividend dates. This is less likely, but it does happen. In this case, you’d get a total of $ 2.54 from all three income streams – the money option, the dividends, and the capital gain. For investors who like knowing their exact upside potential before making a trade, selling covered calls can be a viable strategy. The potential “downside to this upside” is that your price increase is limited by the difference between the price and the underlying units. Conversely, the price could not, but you would have the option money as a partial hedge. Risks: Energy Prices – Even though NS has 93% of its contracts on a fee basis, another prolonged downturn in energy prices could stall rig counts, even in the Permian, which would mean lower EBITDA in 2018.
Recently, though, we’ve got a little bit more – WTI crude futures are up 12.5% ​​over the past month and $ 64.31 on Friday, 1/12/18, their highest value since December 2015. Execution – If NS’s management is unable to achieve EBITDA gains from these new Permian assets, it could affect NSH’s distributions. As many readers have pointed out, though, they have gone through a difficult period of time with their business as usual, which has been at $ 1,095 since 2011. Hurricanes – NS suffered hurricane damage in the fall of 2017. It was rated for loss of net worth of $ 11 million as a result, which is about 8% of projected 2017 net income. Eagle Ford Contract Expirations 2018 EBITDA guidance accounts for contract expirations, management response, “it takes all of our business. and it’s all about it. ” Positive Developments: Q3 earnings call: Q3 earnings call: “Receipts on our Permian System are up 56% from 115,000 barrels per day in April to October of around 180,000 barrels per day.” “In their third quarter earnings calls, major producers reported strong results in the Midland Basin and they are able to continue to capitalize on the geological advantages of refinement and improvement of drilling technology combined with strict cost control. hey are assuring their investors that even if they grow up, they are expected to produce growth, in many cases in the double-digits. ” Binding Open Season Involving a second capacity expansion of NuStar’s Permian Transportation and Storage LLC’s Permian Crude System. “The NuStar Permian Crude System Expansion No. 2 is currently expected to consist of three phased-in expansion projects, including: Big Spring South Inlet, Colorado City Mainline Expansion, and County Line Loop. 70,000 barrels per day of additional capacity. ” (Source: NS website)
Price Targets Analysts: At $ 16.70, NSH is 8% off the average price target of $ 18.00 and 20% off the $ 21.00. valuations: NSH has a low trailing P / E of 8.43, which is below the low end of its five-year P / E range. However, its Q2 ’17 earnings were pumped up by the Permian Acquisition. It resulted in a non-cash gain of $ 41.6 million related to the increase in value of NuStar GP Holdings, LLC’s proportionate share of NuStar Energy LP’s capital. NSH looks cheap vs. broad industry averages on a price / book basis, in addition to having a much higher yield. Its price / DCF of 7.51 compares favorably vs. other midstream pipeline firms that we follow, which have been running at ~ 6x up to ~ 14x. Financials: NSH looks good vs. other anemic current ratio industry averages for these metrics. It is very low debt, hence its ultra-low .50 net debt / EBITDA and .17 debt equity ratios: Debt and Liquidity: “Our revolving credit facility dated June 28, 2013, currently has a borrowing capacity of up to $ 60.0 million, of which up to $ 10.0 million may be available for letters of credit. to increase the amount of debt, and to increase its debt from $ 50.0 million to $ 60.0 million. total of 2,926,833 NuStar Nutritional Energy Efficiency Energy Efficiency Energy Efficiency Energy Efficiency liquidity and capital resource requirements. ” (Source: NSH website)
NSH had a short-term debt of $ 42.5M, vs. total equity of $ 256.59M, as of 9/30/17. (Source: NSH Q3 ’17 10Q) Summary: We rate NSH a buy. We feel that its quarterly $ .545 distribution should continue into 2018 and 2019, offering unit holders a very attractive 13% yield. CLARIFICATION: The options trades for you are on our DoubleDividendStocks.com site. NSH is not part of our Hidden Dividend Stocks + portfolio. All tables furnished by DoubleDividendStocks.com , unless otherwise noted. Disclaimer: This article was written for informational purposes only, and is not intended as a personal investment advice. Please consider this article.
Disclosure: I am / we are long NSH.
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 this article.

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