Nustar (NS): Pipelines and asphalt

"One stock that could benefit from the stimulus plan is NuStar Energy (NYSE: NS), a master limited partnership that owns refined products pipelines and related infrastructure such as crude oil terminals," says Elliott Gue.

In The Energy Strategist, the advisor adds, "The firm's other operations are in asphalt, which should benefit as billions are pumped into the Federal Highway Administration."

"In its pipeline operations, NuStar is paid based on the volume of oil and refined products traveling through its pipelines, not the value of those commodities.

"The nasty recession has resulted in an outright drop in volumes of refined products traveling through US refined products pipelines.

"The obvious supposition is lower revenue for NuStar; however, there’s a key offset in the form of higher rates. Effective July 1, 2009, NuStar's tariffs increase by about 7.5%, more than offsetting the decline in volumes. These tariffs reset automatically based on inflation-indexed increases.

"In addition to pipelline operations, about one quarter of NuStar's operating earnings comes from its two asphalt refineries. Like all refining operations, NuStar's margins in asphalt vary from quarter to quarter.

"NuStar earns a profit based on the spread between the cost of the crude oil it must buy as feedstock for its refineries and the value of the asphalt and other products NuStar makes.

"There are several potential positives for the asphalt markets. On the supply front, several companies that used to produce asphalt have stopped doing so. The reason is that most refiners have set up their operations to maximize production of light products such as gasoline and diesel fuels.

"These companies have installed special equipment that allows them to turn heavy residual products like asphalt into these lighter, higher-value products.

"As a result, in 2008 US asphalt production was off 10% and imports were down nearly 50% against 2007 levels. This leaves less competition for NuStar's dedicated asphalt refineries.

"At the same time, the stimulus bill will pump billions into the Federal Highway Administration as well as recapitalize states struggling with fiscal shortfalls.

"Building new highways means using more asphalt; some estimate that the stimulus package could mean as much as a 10% jump in asphalt demand for FY2010 and beyond. Higher demand and sluggish supplies spells higher margins in the asphalt business, and that’s good news for NuStar.

"One point to note is that NuStar has traditionally relied on shipments of heavy crude from Venezuela as feedstock for its refineries. This is less of an issue than it might seem.

"The US remains the only real market for Venezuela's heavy crude as that oil wouldn't have much value in Asia at present.

"And while Venezuela has announced cuts to heavy oil shipments in compliance with OPEC quota reductions, NuStar has stated that it has several alternative heavy oil suppliers offering similar profit margins.

"I cut my recommendation on NuStar from buy to hold last year due to concerns that this refining business would add to cash flow volatility.

"But, in light of the potential boost in asphalt demand and ongoing cuts to supply coupled with NuStar's flawless execution over the past year, I’m now a believer. Yielding nearly 9%, NuStar Energy is a buy under 55."