OT - After looking at a strategy to capture the potential Value Buy expecting a sell off due to a distribution cut specifically NSH using options . . . just buy the stock(s) if/when they reach the value buy price.
My Conclusion: Buy NS below $36.00/share and/or NSH below $15.00/share
Re NS/NSH -
I looked at several hedging strategies with this stock (ie NSH) to see if there was some type of longer term hedge (w/ options) that would allow me to stay in my small position but take advantage of the coming downside perhaps as low as $17.5/share) to load up on more shares. As this involved buying twice as many Puts (out of the money) and selling covered calls, I will not go into my analysis but just share my conclusion. Conclusion: Not cost effective due to high spread in option prices and total cost to put on a four month hedge.
If the expected distribution cut is made (even if it is temporary) the stock should sell at a price that is equal to the cost of capital plus some small premium (reflecting default risk) assume that total is 8%. Then taking an estimate of the new annual distribution amount (one that provides acceptable distribution coverage adjusting for all the cuts and/or debit pay down), one just needs to just divide this figure by the cost of capital to arrive at a fair value estimate for the stock price.
NuStar GP Holdings, LLC (NSH) - Estimating the stock price from a distribution cut from MLP NS.
NSH itself is unlevered and get's about 50% from it's cash flow from the ~11.5% stake in NS units it holds.
If NS cuts their distribution by $1.50/unit, that translates into a savings of $117Mln. Add a 20% cut in expenses (equates to $20Mln) and that frees up $137Mln to pay down debt and/or apply to next year's $380Mln Capx. This translates to $0.75/share per year in lower distributions to NSH. Therefore assuming that NSH's IDR unit generates the same FCF as last year, NSH estimated annual distribution amount may/could be $1.43/share. Using the 8% cost of capital value, NSH's stock price could fall down to $17.875/share (12.33% lower from the current market closing price of $20.39/share).
NS's stock price might fall down to $36.00/share as their adjusted annual distribution figure is now $2.88/year (down from $4.38/year). Using the same 8% cost of capital figure, NS's stock price would be $36.00/share (only 5.25% lower from the current market price of $38.01/share).
There are a lot of moving parts but NS's price is adjusting to a potential distribution cut much faster than NSH.
The eventual Value Buy:
If/when a distribution cut is announced by NS, look for at least a $1.50/unit. Then the following value buys may be in play:
NuStar GP Holdings, LLC (NSH) - May nibble at a few shares below $15.00/share (w/ fair value at $17.75/share).
NuStar Energy L.P. (NS) - Begin to nibble at shares at $36.00/share or lower. (estimated fair value is $36.00/share)
If the cut is less than $1.50/share, then management may not have done enough to help sustain future growth which is necessary to get the share price higher to offer a secondary. Their last stock offering was September 7, 2012 where NuStar Energy L.P. (NYSE: NS) priced a 6,200,000 share (7.95% share dilution) secondary stock offering at $48.94 per share. That's 30% higher from the current closing price.
Therefore, for me, NS has all of the good assets, appears to have already adjusted for a future distribution cut. This is the one I want to hold long term. If/when a distribution cut is announced, the market may over react and sell this one down much lower than the $36.00/share expected price. That will be my Value buy entry point.
NSH, is leveraged more on those NS distributions so if/when a distribution cut is made this one begins to look interesting at $15.00/share.
My pick is NS below $36.00/share now.
EKS |
