NuStar, Velocity in Eagle Ford Deal - Analyst Blog

A unit of San Antonio-based partnership NuStar Energy L.P. (NS) has signed a letter of intent with an Oklahoma firm – Velocity Midstream Partners – to construct a pipeline system that will carry west Eagle Ford shale oil products from Velocity's Gardendale hub to NuStar's terminal facility in North Beach Corpus Christi, Texas. 

As per the deal between NuStar Logistics L.P. and Velocity, the later will develop and operate the new 70-mile, 12-inch diameter pipeline with a capacity to transport more than 100,000 barrels per day of condensate from Gardendale, Texas to NuStar's new Oakville Storage Facility near Three Rivers, Texas. This storage facility, now under construction, will in turn be linked with NuStar's existing 16-inch 200,000 barrels per day pipeline running to its Corpus Christi North Beach Terminal. Both Velocity's new pipeline and NuStar's Three Rivers storage facility are expected to be operational by April next year.

NuStar sees the association with Velocity as part of its larger strategy to improve its customers' logistical flexibility by moving the crude and condensate from the Eagle Ford region to Corpus Christi. In the process, NuStar's customers will get access to a large market with contacts to major refining and trading hub markets throughout the Gulf Coast.

NuStar Energy – which competes in the ‘Oil and Gas Pipelines' industry with firms like Duncan Energy Partners L.P. (DEP) and Enbridge Energy Partners, L.P. (EEP) – has a Zacks #3 Rank (Hold rating) in the short run. It is the fourth largest independent liquids terminal operator in the world and second largest in the U.S., apart from being the number one asphalt producer on the East Coast and number three asphalt producer in the U.S.

Longer-term, we have a ‘Neutral' recommendation on NuStar, reflecting a balanced risk/reward profile. The partnership owns a high quality, large and diverse asset portfolio. Other positive attributes in the NuStar story are its robust balance sheet, investment grade rating and strong track record for distribution growth. We believe NuStar's recent ‘Age Refining' acquisition will provide it with significant economic benefit and be immediately accretive to the partnership's cash flow.

However, we also believe these positives are already reflected in its current valuation, and there is not much upside from the current price level. We remain wary of the higher business risk associated with its more volatile asphalt operations. As such, we see NuStar units performing in line with the broader market.