NuStar Energy L.P. (NS-NYSE)
February 24, 2012 Issue
The Most Powerful Name In Corporate News and Information
With their Pipeline Business Experiencing Sudden Growth Due to the Oil and Gas Shale Discoveries in the US to Go Along With their Storage Terminals and Asphalt and Fuels Marketing Segments, NuStar Energy L.P. is Well Positioned for Future Growth in all of Their Business Segments
NuStar Energy L.P.
is a publicly traded, limited partnership based in San Antonio, with 8,417
miles of pipeline; 89 terminal and storage facilities that store and
distribute crude oil, refined products and specialty liquids; and two
asphalt refineries and a fuels refinery with a combined throughput capacity
of 118,500 barrels per day. The partnership’s combined system has
approximately 98 million barrels of storage capacity. One of the largest
asphalt refiners and marketers in the U.S. and the second largest
independent liquids terminal operator in the nation, NuStar has operations
in the United States, Canada, Mexico, the Netherlands, including St.
Eustatius in the Caribbean, the United Kingdom and Turkey.
President and CEO, NuStar Energy L. P.
& President and CEO, NuStar GP Holdings, LLC
Curt Anastasio is President and CEO of NuStar Energy L. P. (NYSE: NS), a publicly traded master limited partnership based in San Antonio, Texas.
NuStar Energy L.P. is one of the largest asphalt refiners and marketers in the U.S. and the third largest independent liquids terminal operator in the world. Its assets include two asphalt refineries and a fuels refinery with a combined throughput capacity of 118,500 barrels per day, 8,417 miles of pipeline, and 89 terminal and storage facilities that store and distribute crude oil, refined products and specialty liquids with a combined 98 million barrels of storage capacity. NuStar’s assets are strategically located in major U.S. markets and in Canada, Mexico, the Netherlands, the United Kingdom and Turkey. The company also markets and trades refined products and crude oil through its asphalt marketing, wholesale marketing, and supply and trading operations.
Anastasio is also President and CEO of NuStar GP Holdings, LLC (NYSE: NSH), which owns general partner and limited partner interests and the incentive distribution rights in NuStar Energy and manages its business affairs.
Since joining the company in 1988, Anastasio has held various positions in supply, trading, transportation, marketing, development and legal. He has been President of NuStar Energy L.P. and its predecessors since December 1999, and he assumed the position of CEO of NuStar GP Holdings, LLC in 2006.
Anastasio serves as a member of the Board of Directors and Executive Committee of the National Association of Publicly Traded Partnerships, and he previously served as the organization’s Chairman. He also serves as a Director of the San Antonio Branch of the Federal Reserve Bank of Dallas. He is a former Vice Chairman of the Board of Directors of the Greater San Antonio Chamber of Commerce, and is a member of the 30th class of the Chamber’s Leadership San Antonio, an organization comprised of existing and emerging leaders whose primary goal is community service.
In addition to participating in various volunteer activities, Anastasio is a member of the Board of Trustees of the United Way of San Antonio and Bexar County, and was the Chairman of the record 2011 communitywide United Way Campaign that raised over $48 million. He also serves as Trustee Emeritus of the McNay Art Museum, and as a Board Member of the San Antonio Medical Foundation, Southwest Research Institute, Texas Biomedical Research Institute, Alamo Area Council of the Boy Scouts of America, and the Economic Development Foundation – all of which are located in San Antonio. Additionally, Anastasio belongs to various professional organizations and has lectured and written on legal and business topics.
Anastasio received a Juris Doctorate degree from Harvard Law School in 1981 and a Bachelor of Arts degree, Magna cum Laude, from Cornell University in 1978. After graduation, he practiced law in New York City.
Born in New York City in 1956, Anastasio and his wife, Lorraine, have three children.
Interview conducted by: Lynn Fosse, Senior Editor, CEOCFO Magazine, To be published – February 24, 2012
Mr. Anastasio: We went public in April of 2001 with a company that later became NuStar, as a partial spin-off as an MLP. It had some pipeline and storage terminal assets, but mostly pipelines that required bigger a refining company; the predecessor of Valero. That was really financially driven in the sense that the MLP market in place was valuing those midstream assets at a higher valuation than they were refining stocks. As time went on and we grew and Valero’s ownership diminished, we came up with a growth strategy that went well beyond a financial arbitrage, which was the starting point of the company. Really, what we saw there was the growth opportunities in all sectors, all business segments of our company and expanding the business we did with third-party companies, not just with Valero our parent company. Therefore, we went from trying to capitalize on a financial or valuation arbitrage, to a strong growth company as the years went by.
We have three business segments today; the pipelines, the storage terminals,
and asphalt and fuels marketing. In the pipeline business, which has been a
very steady, but slow-growing business for us historically, it has all of a
sudden become a fast-growing business. That growth is being fueled primarily
by the oil and gas shale discoveries that are being made in the United
States and especially for our company in south Texas in the Eagle Forge
shale area. As a result of the explosion of the Eagle Forge shale, we have
been able to utilize existing assets, pipelines that we have that were
previously under utilized, to fill them up and tie them into the oil shale
discoveries. We also have some green fields that were new pipeline projects
that we are developing with customers, producers and refiners to bring the
oil to market and to bring it to the Gulf of Mexico, so they can ship it to
various destinations. So, in the pipelines the growth is being propelled
primarily by the shale discovery and in particular Eagle Forge shale. The
second business segment out of the three is the storage segment. That has
been our fastest growing segment for the last several years, and the growth
in that segment continues to be strong notably in a few locations that we
have that are strategic to the industry. One of those is at a place called
St. James, Louisiana, which is on the Louisiana Gulf Coast. It is primarily
a crude oil storage hub for the global oil industry, but there are also
other petroleum related activities that go on there as well. That growth has
involved a tank expansion. When we bought that facility back in 2007, they
had barely 3 million barrels of storage there. Today, we are up to over 8
million barrels now and we think the capacity will be 11 or 12 million over
the next couple of years. Therefore, there has been rapid growth there and
we also have entered into a unit train partnership to expand deliveries into
that with EOG Resources, which is the largest independent oil and gas
producer in the United States. That rail delivery piece at St. James relates
to oil shale discoveries, not south Texas in that case, but in the Bakan oil
shale discovery. We are capitalizing on another oil shale discovery there.
Mr. Anastasio: We started out as a US predominantly pipeline company. We expanded into Mexico with a project that made us the first company delivering LPGs or propane into a terminal we built in northern Mexico. Then later on, we connected a Mexican pipeline to our Rio Grande Valley pipeline for refined products. The other international occasions for the most part came when in 2005 we bought another MLP called KANUB. We bought their general partner and their MLP. They are kind of structured like us. We bought both entities and that put us into the international business. It was strategic in the sense that we wanted to have more third-party business, so it is diversification. In addition, we wanted more storage. We were predominantly a pipeline company and KANUB was predominantly a storage company, so we got the customer diversification and along with that came geographic diversification. We also got much more of a storage business. We saw that we had the opportunity to invest more than they had in storage expansion in some of their key locations and that is exactly what happened. We tripled the size of their Amsterdam terminal. I mentioned growth in Skaitia and Lynden and some of their other locations have grown as well, so that was strategic in the senses that we just identified to have the geographic spread that we have.
We need to diversify our crude and feedstock slate. We bought a business
from CITGO that was really predominantly about monetizing Venezuela crude
oil. As you know, CITGO is controlled by the Venezuela national oil company,
Faita Basin. They had a business where they would run heavy Venezuelan
crudes in the two east coast refineries that were under the CITGO name and
thereby monetized the crude oil. That is fine, but we need to do more than
that. The Venezuelan crude contract is a good one for us, but we do not have
crude production. We have to make money on asphalt and intermediate that are
produced by these plants and to do that you need to have more than one
source of crude oil as the market changes. In addition to the Venezuelan, we
signed an agreement with a Norwegian national oil company for a crude oil
called Pena Perugino, which is an offshore heavy Brazilian crude. We have
also begun railing undiluted western Canadian crude into our Paulsborough
plant and we are looking at doing that in Savannah as well. Therefore, we
have gone from a one-source of crude company to a three-sources of crude
company and you will see that expand further, particularly on the Canadian
front where we see a lot of potential to run more Canadian crude.
One good thing about the sector of the energy industry we are in, the
midstream sector is that we are on the whole, less directly impacted as the
upstream and downstream sectors have been in regulation. You look for
example, at what some of our refining customers have to do to comply with
regulations. You are talking about billions of dollars of capital that has
to be spent that yields no return to investors. We are in that sense
fortunate that we have a much lighter load to carry on regulation. That
having been said, even in our industry regulations are increasing all the
time. We have a regulator, whether it state or federal or otherwise
somewhere in our assets every single day of the year, 365 days a year. Those
visits and investigations have only increased under the current
administration. Recently there was a pipeline safety bill passed, and
through Industry Trade Associations, we had a lot of input onto how that
bill came out. The way the bill came out actually required pipeline
operators like us to do things that a lot of which we already do. Those that
are behind the curve, some of our competitors will have to invest more
money, time, and attention in pipeline operations and safeties. Fortunately,
we came out pretty well on that, because we are already acting like a
best-in-class pipeline operator, but there is constant pressure. We do have
some assets on the west coast including in California, which is the most
prickly regulated energy market in the country in every respect. We have
regulators and inspectors in there for air, water, for everything, every
single day. Our people are constantly under the microscope in that regard.
Mr. Anastasio: We have a really strong corporate culture here that Bill Greehey the founder of Valero Energy developed when he started Valero. When Bill retired as CEO in 2005 and was chairman in 2006, he came over as chairman of my board. We made a commitment to carry forward the old Valero culture. It is a culture that puts employees first. I know a lot of companies say that, and it is lip service in a lot of places, but we actually do that. It is a very strong corporate culture of giving back to the community. Our people are setting records every year here on volunteer hours, on money contributed to charitable causes. We have here in San Antonio our United Way campaign, which I was privileged to lead last year. We had the highest per capita giving in the country to United Way. We have very generous people who really have an ethos that says, “You are not a success unless you share your success with others”. That is what our people are doing. There is a lot of pride to work for this company, because we are so highly regarded, not just as a place to work because we have good pay and benefits, which we do, We had an independent benefits consultant saying that we had the best pay and benefits in our industry. In addition, in the communities where we operate everyone knows our people. They are on boards, and they are out there in the community involved in helping others, so as a result it is a very attractive company to be associated with. The culture is strong and related to that is our safety and environmental performance, which is again is the best in our industry. We start every meeting with a safety review; even my meetings at the CEO level. Our statistics get better. Every year they have been absolutely terrific compared to every other sector in the energy industry. We also have embarked on something called a VPP Star Status Program, which is a program run by OSHA. This is a program that is bottom up. It starts with the employees in the field learning the principles of process safety management and reviewing all of their operations. Eventually what happens is they go through an application and an audit practice with OSHA and what we have managed to do in 7 locations now, we are doing it by region, maybe eight. It is getting the highest possible designation as a safe place to work and our goal is for the entire company to achieve VPP Star Status under the OSHA program. I am sure we will; our people are committed to it. It is a lot of work and it takes time and money, but most of all it takes the commitment of the employees to have the best possible work environment. It is good for our employees, the communities where they are operating, and it is great for the company. So it is another thing I think our people are proud of as this has developed.
Mr. Anastasio: It is very good. You look at our three-year total return as part of our incentive compensation and most recently our three-year return has been 72% plus, so that is pretty good. To average something like 34% annual return is quite good. Since the NuStar IPO our total return is 354%, so actually the 72% lags our ten-year performance. Over the ten or eleven years, we have averaged in excess of 30% a year in financial return, if you are an investor in this company. One of the attractive things about that and a big part of our returns is the dividend. We pay a very high dividend both at NuStar Energy, and at NuStar Holdings. We pay out a lot of our cash flow as dividend to investors and that currently right now, NuStar Energy pays about a 7.5% dividend, depending on what the stock price is on any given day. Our holding company pays maybe about a 6% to 6.5% dividend, so both of those are very attractive when you look at end year treasuries yielding under 2% and people struggling to make more than low single digits. So, even if the stock does not move a penny, you are locking in a 7.5% dividend in NuStar Energy if you buy it today. On top of that, we have grown the dividend every single year in the close to eleven years now of our existence, so you can count on not just the existing dividend, but a growing dividend if you are an investor in NuStar. That has been reflected in the stock price, but also just the dividend alone makes it a very attractive investment.
Mr. Anastasio: The number-one worry for me always has been from day one, safety and environmental. That is why we have given so much emphasis to it. I am not worried because we are not good at it; we are excellent at it. We are excellent at it because we are worried about it. We make it a high priority because that is something where if you do not do it well, you are endangering your people, the communities where they are working, but on top of that, you are also endangering the financial condition of the company. If anybody proved that, unfortunately it was BP who had a series of safety and environmental catastrophes over the last several years. They did not do that part of the job well and it slammed their value. The value of the company dropped drastically. It even endangered their solvency at one point. People were worried whether BP after the spill would have to file for bankruptcy, so it was a very vivid example of how important this is. I talked to a lot of Wall Street audiences and they are very focused on your cash flow, what were your earnings last quarter etcetera. They do not care much about safety and environmental until it blows up into a problem. Then it is turns out to be a huge financial issue and not just a reputation or safety or environmental issue. Therefore, we have and we will continue to spend a lot of time on that. You mentioned regulation. At some point, if we are going to continue to have increasing regulations in our industry that limit oil and gas production or that make it more costly, it is going to affect our customers and that will affect NuStar and all of our peers as well.
Mr. Anastasio: Absolutely! That is a significant part of my job, the CFO’s job and the head of our investor relations. In fact, today as we speak he is at an investor conference sponsored by one of the investment banks that is big in this sector of the energy industry. He is meeting with investors and making a presentation to analysts. It is not just quarterly results and getting on the phone and talking about a result each quarter. It is pretty much continuous communication with our shareholders and with analysts. We have a robust program to do that. We make a number of presentations during the year. We have an analyst day where we take them to some significant locations and talk about what is happening in the company and what is next. We also have a bankers day and all important constituencies of our company are a target of our communications program.
Mr. Anastasio: People should watch for the growth in our pipeline. We are going to have pipeline projects over the next couple of years that I have detailed in some of my public comments. On the storage side we have some sizeable expansions in the wings. I mentioned St. James, St. Eustatius as two of the biggest ones that are going on in our company. Then there is the money going into the asphalt and fuels marketing to optimize the system and to expand our bunker marketing and our fuel and oil marketing and crude trading. Those are the things we are working on now over the next couple of years. A lot of that involves money being invested this year in 2012 that yields cash returns in 2013 and beyond. It is a little bit, especially the first half of the year or so where we are spending a lot of money to get to the point where we make much more money than this company has every made starting in 2013. That will become more visible to our shareholders as we get late into 2012 and more of these projects are finalized, announced and they are actually under construction. In the mean time, we are offering an extremely attractive dividend, one of the highest dividend yields you can get in an investment grade investment. I should have mentioned we are investment grade rated by all the credit rating agencies. NuStar is both NuStar and NuStar GP Holdings and that is true of only a minority of the companies in our sector, the MLPs (Master Limited Partnerships) and most of them are not investment grade or they are so-called junk rated. We are a high credit quality offering very high yield; about 7.5 % dividend currently. Therefore, you are being paid very generously to wait for some very exciting projects that are going to fuel the next stage of growth in our company in 2013 and beyond, and a dividend is tax advantaged. Most of the dividend you get is not subject to current income tax, so that 7.5 depending on the tax bracket you are in is more like 10 or 11 or 12 % depending on your bracket. So, the cost of these tax advantages on top of the high cash flow being paid out of the distribution, and an investment credit rating on top of that, it is unique, NuStar should really be part of anybody’s portfolio.
You look at our three-year total return as part of our incentive compensation and most recently our three-year return has been 72% plus, so that is pretty good. To average something like 34% annual return is quite good. Since the NuStar IPO our total return is 354%, so actually the 72% lags our ten-year performance. Over the ten or eleven years, we have averaged in excess of 30% a year in financial return, if you are an investor in this company. One of the attractive things about that and a big part of our returns is the dividend. We pay a very high dividend both at NuStar Energy, and at NuStar Holdings. We pay out a lot of our cash flow as dividend to investors and that currently right now, NuStar Energy pays about a 7.5% dividend, depending on what the stock price is on any given day. Our holding company pays maybe about a 6% to 6.5% dividend, so both of those are very attractive when you look at end year treasuries yielding under 2% and people struggling to make more than low single digits. - Curt Anastasio
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