Citi Prefers Nustar Energy Over NuStar Holdings, Upgrades Both To Buy

Citi upgraded both NuStar Energy L.P. NS and NuStar GP Holdings, LLC NSH to Buy from Neutral, primarily driven by increased Mexican refined product demand and future crude exports.

NuStar is an MLP with strategic crude and refined product storage/terminal and pipeline assets tied primarily to U.S. refineries and multi-year contracts.

Citi's bullish thesis on NuStar is also centered on RINs and ethanol blending capability, less burdensome IDRs and improving cost of capital, and downside risk protection due to contracts and strategic assets.

"The lift of both the US crude export ban and Mexican refined product pricing mandate, positions NuStar well in the next several years to achieve growth with new volumes and expansions on its US Gulf Coast pipes, storage, and terminal assets," analyst Ryan Levine wrote in a note.

The analyst sees capex opportunities north of $1.2 billion over the next few years as increased gasoline, diesel and LPG volume are shipped to Mexico and the outlook for increased crude exports improves.

Apart from stable cash flows, Levine expects NuStar to raise equity, delever, and resume its distribution growth over the next few years on favorable fund flows, improving capital markets, and a 23 percent IDR cap. The analyst projects distribution growth of about 3 percent at NuStar Energy and about 5 percent at NuStar GP through 2020.

Levine increased his price target for NuStar Energy to $52 from $51 and NuStar GP to $29 from $26.

"We prefer NSH over NS because it is more levered to distribution growth and has a higher ETR," Levine added.

Units of NuStar Energy closed Thursday at $48.75, while NuStar GP closed at $24.85.