Permian Beginning To Pay Off For NuStar

A year after entering the Permian Basin through the very costly acquisition of Navigator Energy Services LLC, NuStar Energy LP (NYSE: NS) is beginning to reap the benefits of that $1.475 billion deal. While the company experienced slow run rates from its Permian crude system shortly after completing the acquisition, activity is ramping up significantly in recent months and system throughput is up 117% from last May.

Nominations on the system for May 2018 rose to 275,000 barrels per day (bbl/d), which is a large increase from the first-quarter run rate of 210,000 bbl/d. The company anticipates run rates of 360,000 to 380,000 bbl/d by the end of the year.

NuStar’s president and CEO Brad Barron attributes the increase to the upsurge in drilling rigs in the play since NuStar entered the region last year.

“The Permian Basin overall has continued to outpace all other U.S. shale plays in growth, development and efficiency,” he said during a conference call to discuss first-quarter earnings. “There are now 453 rigs [in the play] and the Permian is up over 30% from 342 when we acquired the system last May.”

NuStar also announced strong interest for its second capacity expansion open season in the Permian. This project is expected to cost about $190 million in full and will increase total capacity to 460,000 bbl/d when it is completed in July 2018.

While production out of the Permian has been increasing overall, growth on the NuStar system has outpaced that of many other systems because of the quality of its customer base. A recent research note from East Daley Capital’s vice president of research, Justin Carlson, stated that companies utilizing NuStar’s Permian crude system include a plethora of top 15 producers (by volume) in the play. These include Occidental Petroleum Corp. (NYSE: OXY), Concho Resources Inc., SM Energy Co., ExxonMobil Corp. (NYSE: XOM), Energen Corp. (NYSE: EGN), Diamondback Energy Inc. (NASDAQ: FANG), Parsley Energy Inc. (NYSE: PE), RSP Permian (NYSE: RSPP), Surge Energy Inc. and CrownQuest Operating LLC.

“All of these companies have guided to 20-to-75% exit rate volume growth this year, highlighted by SM Energy at around 75% and Exxon’s at around 58%, both of which have significant acreage dedications,” Carlson said.

East Daley Capital noted that several headwinds remain: capital constraints may present themselves if further expansion is needed and earnings guidance is not hit; and, well completions and volume growth could slow again if regional prices continue to weaken. “However, given its size, Permian growth is likely to overwhelm these … headwinds. And despite several speedbumps during its first year, NuStar Permian is well positioned for significant growth,” Carlson said.

Exporting to Mexico

One of these areas that is expected to help contribute to this significant increase in growth comes south of the border. In addition to growing its Permian system, NuStar also announced it will be expanding its South Texas assets to supply refined products to Mexico.

This includes adding capacity on its existing Laredo-to-Nuevo Laredo pipeline, as well as increasing the size of its Nuevo Laredo, Mexico, terminal. This also includes adding storage and truck rack capabilities at the terminal.

"[S]ince Mexico’s energy reforms began, we have been excited about the new opportunities those reforms present for us. We’ve worked to position NuStar to take advantage of these opportunities by utilizing our existing assets in South Texas and Mexico to supply products to the Mexico market,” Barron said during the conference call.

NuStar officials announced they signed several long-term transportation and distribution contracts with customers to support this expansion project. The company declined to announce who these contracts were with, but Valero Energy Corp. (NYSE: VLO) officials confirmed they were one of the companies that signed up to transport volumes to Mexico on the NuStar system.

The agreement allows a Valero subsidiary to transport gasoline and diesel to northern Mexico from its Corpus Christi and Three Rivers refineries in Texas. It is expected that volumes will begin to be delivered to the Nuevo Laredo terminal by the end of 2018. NuStar plans on spending $50 million on projects related to Mexico in 2018 with a further $120 million earmarked to complete these export projects in 2019.