We are downgrading NuStar Energy L.P. (NS) units to Underperform from Neutral, reflecting the challenging business environment for pipeline operators.

The current economic downturn and the resulting commodity-price weakness, coupled with reduced access to the credit markets, have led to lower spending by consumers and businesses on transportation fuels such as gasoline, aviation fuel and diesel. This translates into less transportation volumes for pipeline operators such as NuStar, eroding its cash flows and distributions.

While the partnership’s liquidity position is sound, we continue to believe that the near- to medium-term outlook for petroleum products expenditure remains weak.

Another concern for NuStar is the weak demand for refined products that translates into lower pipeline throughputs. To cope with the squeeze in refining margins (on the back of narrow crude oil differentials and high inventories from weak demand), refiners have cut back production and/or shut down indefinitely. The shut-in refinery capacity and/or reduced refinery runs result in significantly lower pipeline throughputs, adversely affecting NuStar’s results of operations and ability to make distributions to the unitholders.

Further, the addition of the asphalt business has increased the partnership’s exposure to volatility in commodity prices. Given these headwinds, we expect NuStar units to be under pressure in the near future.

San Antonio, Texas-based NuStar Energy L.P. is a master limited partnership (MLP) that engages in the transportation and storage of crude oil as well as refined products in the U.S. , the Netherlands Antilles, Canada, Mexico, the Netherlands and the U.K. The partnership is one of the largest asphalt refiners and marketers in the U.S. and the second largest independent liquids terminal operator in the nation.

NuStar’s current asset base includes 8,417 miles of pipelines, 82 terminal facilities, 4 crude oil storage tank facilities and 2 asphalt refineries, with a combined throughput capacity of 104,000 barrels per day. The partnership’s combined system has more than 91 million barrels of storage capacity.

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