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An attractive buy for crude oil export-minded companies, NuStar knows its value

NuStar GP Holdings LLC is an attractive buy for other energy pipeline companies looking to gain a foothold in the booming crude oil export business, but its recent rejection of Energy Transfer Equity LP's unsolicited acquisition offer indicates the firm will not scuttle its corporate consolidation to partner with just anyone.

After announcing plans to merge with NuStar Energy LP on Feb. 8, the general partner on March 5 received a formal proposal to be acquired by Energy Transfer Equity, or ETE, for $14.70 per unit in cash. NuStar GP Holdings Board Chairman William Greehey refused to withdraw his support from the internal reorganization and support a buyout, which would have substantially diluted his influential 21% ownership of NuStar GP Holdings' common stock.

Beyond Greehey's own interests, however, lies the consensus that NuStar's master limited partnership is a ripe takeover target for another midstream company with assets in Texas' Permian Basin seeking to complete the value chain. NuStar Energy's oil export facilities in Corpus Christi, Texas, and Navigator oil gathering and processing system could be the first asset class of its kind if a buyer adds a long-haul transportation pipeline, according to Barclays.

"We are not surprised that other midstream companies are evaluating NuStar as a potential acquisition. ... No midstream company currently has a vertically integrated footprint from the Permian Basin to Corpus Christi," Barclays analysts wrote in a March 15 note to clients. "An operator could realize higher value from the Navigator barrels if they are used to underwrite a long-haul takeaway solution or if they can fill existing long-haul pipelines in times of slack capacity."

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In this case, ETE's low-ball offer and tumultuous track record could not lure NuStar GP Holdings' board and management away from a unit-for-unit merger deal with its MLP, which is intended to boost the valuation of a lower-coverage and higher-leverage partnership like NuStar Energy by eliminating the incrementally increasing quarterly payments it makes to the general partner. NuStar Energy continues to struggle on the stock market in 2018, with shares down nearly 27% this year compared to the bellwether Alerian MLP Index's 8% loss.

While ETE's proposal included the "possibility" of an all-equity or equity-cash transaction, SL Advisors LLC Managing Partner Simon Lack said NuStar was smart to reject the $14.70 per unit value for an all-cash deal.

"I can't blame them for holding out. … I wouldn't pay cash. I would have turned it down if I was NuStar," Lack said in an interview. "Considering what they'e done with the business, they've got to believe it has a much higher ultimate valuation than where it's at."

Lack also pointed to Energy Transfer chief Kelcy Warren's management style and reputation as an unattractive M&A partner, pointing to the partnership's failed acquisition of Williams Cos. Inc. that fell apart in June 2016 after ETE's law firm could not generate a tax-free opinion for the combination.

"Kelcy's a tough guy to deal with," Lack said. "He pursued Williams incessantly and then found it was a bad deal. … He's a great operator, but if he can slip his hand in your pocket and pull out a $100 without you noticing, he's probably going to do it."

Energy Transfer, meanwhile, continues to set its sights on taking a piece of the growing hydrocarbon exports pie. Energy Transfer Partners LP recently formed a joint venture with petrochemical wholesaler Satellite Petrochemical USA Corp. to construct a Gulf Coast export terminal for transporting volumes to Satellite's ethane cracker in China. According to Chinese media, Energy Transfer Partners is making a $334 million investment for a 53% stake in the project.