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NuStar Guidance: More Conservative than Texas

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The Daley Note: February 9, 2023

NuStar (NS) reported positive 4Q22 earnings, beating consensus and East Daley EBITDA expectations by $15 million (8%) and $17 million (10%), respectively. However, what caught our eye was a miss on the company's Permian crude gathering volumes and relatively weak 2023 guidance for the asset.

In 2022, NuStar’s Permian system averaged 584 Mb/d, below management's 600 Mb/d exit-2022 guidance. Management now guides to volumes exiting 2023 at 600 Mb/d, or just 3% growth Y-o-Y. East Daley forecasts crude volumes and performance for the NS – Permian asset in our NuStar Financial Blueprint. We forecast exit-2023 volumes to be 615 Mb/d, or 5.3% growth Y-o-Y on the system.

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For context, East Daley's overall Permian Basin crude production growth forecast (exit to exit) is 9%, and we forecast the Midland sub-basin to grow by 3%. While management's guidance matches our Midland growth expectations, NuStar Permian has historically outpaced overall growth in the Midland (see figure).

Furthermore, Texas state data indicates top producers on the NS - Permian system are CrownQuest, Birch Resources, and ExxonMobil (XOM). The former two are private operators that we believe will continue to grow production at current oil prices. Exxon said its goal is to reach 1 MMb/d by 2027, requiring a compounded annual growth rate of ~13%.

In October 2022, the most recent month for which receipt data is available, the three top producers flowed 259 Mb/d on the NS crude gathering system (~44% of total NS Permian volumes). Additionally, NuStar’s December investor presentation stated that producers on the Permian system increased rigs from ~20 to ~30 rigs.

Winter Storm Elliot could have impacted volumes in December, causing the miss on 4Q22 guidance. However, the reported increase in rig counts and the strength of the producers on this system lead us to believe that management's new 2023 guidance is conservative.

The conservative outlook for NS Permian is one of the reasons why, in our NuStar Financial Blueprint, we expect 2023 EBITDA to be $760 million, on the high end of management's guidance of $700-760 million. – Oren Pilant Tickers: NS.


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