USD Partners LP: A 13% Yielder You Likely Haven’t Considered
Is This 13% Yield Too Good to Be True?
Today I’m highlighting a double-digit yielder that most people have never heard of: USD Partners LP (NYSE:USDP).
Headquartered in Houston, Texas, USD is in the midstream energy business. Structured as a master limited partnership (MLP), the company acquires, develops, and operates midstream infrastructure and complementary logistics solutions for crude oil, biofuels, and other energy-related products.
In particular, the partnership has a network of crude oil terminals, which play an important role in transporting heavy crude oil from Western Canada to key demand areas across North America.
To be more specific, USD Partners’ operations include railcar loading and unloading, inbound and outbound pipeline connectivity, truck transloading, storage, and blending in on-site tanks. To help its customers transport liquid hydrocarbons and biofuels by rail, the company also provides leased railcars and fleet services.
And like I said, this is a double-digit yielder. Trading at $11.04 per unit, USDP stock has an annual distribution yield of 13%.
A High-Yield Stock That Keeps Growing Its Payout
In my opinion, USDP’s yield itself isn’t really the most impressive part about this energy stock. What makes it truly stand out is how the partnership managed to grow its payout.
You see, when USD Partners LP went public in October 2014, it had a minimum quarterly distribution rate of $0.2875 per unit. Its first payment of $0.24375 per unit made in February 2015 was a prorated distribution corresponding to that minimum quarterly rate.
Since then, the company has raised its payout every single quarter. With the latest payment being $0.36 per share, USD Partners stock’s quarterly distribution rate has grown by 25.2% since its initial public offering (IPO).
The chart below shows USD’s annual cash distribution in each year after its IPO:
USD Partners LP Distribution History
(Source: “Distribution History,” USD Partners LP, last accessed April 25, 2019.)
That’s quite an achievement. Given the commodity price downturn a few years ago, an ultra-high-yielding energy stock is often associated with dividend cuts. But that’s not the case at all for USDP stock. Rather than slashing its payout, the company has raised its distribution for 15 consecutive quarters.
One of the reasons why the partnership can keep increasing its payout in a time of volatile commodity prices is its predictable business model. USD generates nearly all of its operating cash flow from multi-year, take-or-pay contracts with high-quality customers, including major integrated oil companies, refiners, and marketers. Therefore, it can run a relatively stable business through the commodity cycle.
Looking at its financials, we see that the company generated $10.9 million in the fourth quarter of 2018, which represented a nine-percent increase year-over-year. Notably, the amount provided 1.1 times coverage for the company’s cash distributions paid for the quarter. (Source: “USD Partners LP Announces Fourth Quarter and Full Year 2018 Results,” USD Partners LP, March 6, 2019.)
In full-year 2018, USD’s distributable cash flow totaled $45.7 million. This allowed the partnership to achieve a solid distribution coverage ratio of 1.2 times for the year.
The best part is, management plans to continue raising the cash payout.
Chief Executive Officer Dan Borgen said:
Given our recent momentum and the fact that we project our cash flows to reflect the higher re-contracted terminal rates starting in July of 2019, we expect to deliver annualized mid-single digit distribution growth for the full year 2019 relative to the full year 2018, subject to the successful re-contracting of our remaining Hardisty and Stroud capacity and the successful execution of our previously announced organic growth project at Casper.
(Source: “USD Partners LP (USDP) CEO Dan Borgen on Q4 2018 Results – Earnings Call Transcript,” Seeking Alpha, March 7, 2019.)
In other words, if things go as planned, investors who lock in USD Partners stock’s 13% yield today would be able to collect even higher yield-on-cost in the quarters to come.