NSH Ranks Fourth in Upside Potential among MLPs


Dec. 11 2017, Updated 9:03 a.m. ET

Recent market performance

NuStar GP Holdings (NSH), the general partner of NuStar Energy (NS), has not entered positive territory since mid-February 2017. NuStar GP Holdings has lost 42.3% in 2H17 and 53.1% since the beginning of this year. During the same timeframe, NS has lost 37.3%.

NSH’s sharp fall in the second half of the year could be primarily attributed to NuStar Energy’s weak earnings, a decline in distribution coverage, and dilution resulting from the equity offering for the Permian acquisition.

NuStar Energy’s (NS) 3Q17 earnings were impacted by a decline in Eagle Ford throughput volumes, weak performance from the fuel marketing business, the impact of hurricanes on the partnership’s operations, and higher interest expenses. 

The Eagle Ford production and drilling activity has remained low since the end of 2Q17. According to Baker Hughes, the crude oil rig count in the Eagle Ford region fell to 60 on December 1, 2017, compared to 76 by the end of the second quarter.

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Valuation analysis

NSH traded at a forward EV-to-EBITDA[1. enterprise value to earnings before interest, tax, depreciation, and amortization] multiple of 10.9x on December 6, 2017, which is significantly below the five-year and one-year averages of 17.7x and 14.3x, respectively. 

NSH’s distribution yield of 15.7% is much higher than the five-year average of 8.0%. Such a high yield may not be sustainable in the long run.

Analysts’ recommendations

NuStar GP Holdings (NSH) ranked fourth in terms of upside potential among MLPs. NSH hasn’t seen any rating downgrades or major price revisions despite its weak market performance. 

This lack of movement could be attributed to the presence of IDRs in NuStar Energy’s capital structure, which entitles NuStar Energy (NS) to a higher share of the incremental distribution. NSH benefited from the equity offering by NS to fund the Permian acquisition.

NuStar GP Holdings is currently trading below the low range ($17.00) of analysts’ target prices. NSH’s average target price of $20.70 implies a 49.0% upside potential from the current price levels. 

Plus, 71.4% of analysts rated NSH as a “hold” on December 6, 2017, while the remaining 28.6% rated it as a “buy.”

In the next article, we’ll look into the upside potential for Martin Midstream Partners (MMLP).


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