USD Partners LP: Should Investors Consider This 14.4% Yield?
This Energy Partnership Offers a Jaw-Dropping Payout
In today’s market, very few stocks offer a more generous distribution policy than USD Partners LP (NYSE:USDP).
In August, the partnership paid a cash distribution of $0.365 per unit. With USDP stock trading at $10.20 a piece, it has an annual yield of 14.4%.
One of the reasons behind USDP stock’s jaw-dropping payout is it’s master limited partnership (MLP) structure. MLPs pay little to no income tax at the corporate level, as long as they distribute most of their available cash to unitholders on a regular basis. Over the years, these pass-through entities have become some of the highest yielders in the stock market.
Formed by U.S. Development Group LLC in 2014, USD Partners is a relatively new name in the business. The partnership operates, develops, and acquires energy-related logistics assets, such as rail terminals and other high-quality and complementary midstream infrastructure. (Source: “USD Partners LP Investor Presentation,” USD Partners LP, last accessed September 27, 2019.)
At the same time, to help its customers transport liquid hydrocarbons and biofuels by rail, USDP also provides railcars and fleet services.
The neat thing about USD Partners is that the partnership generates almost all of its operating cash flow from multi-year, take-or-pay contracts. As a result, it runs a relatively stable business, despite commodity price volatility.
It helps that the counterparties of these take-or-pay contracts are usually investment-grade customers, including major integrated oil companies, refiners, and marketers. Even though USD Partners has only been around for a few years, it has already served some energy-industry heavyweights, such as ConocoPhillips (NYSE:COP), Suncor Energy Inc. (NYSE:SU), and Cenovus Energy Inc (NYSE:CVE).
Of course, we know that commodity prices crashed in the summer of 2014, which is right around the time that USD Partners stock went public. So, given the downturn in the energy industry, what do you think happened to USDP stock’s distributions?
Nope, the partnership did not cut its payout to unitholders. Taking a look at USD Partners’ distribution history, you’ll see that the partnership has paid higher cash distribution to investors every quarter after its initial public offering (IPO). (Source: “Distribution History,” USD Partners LP, last accessed September 26, 2019.)
This is quite a remarkable achievement. During the energy industry’s downturn, many companies—including some of the biggest names in the business—were deep in the doldrums. As a result, dividend cuts weren’t uncommon. The fact that USDP stock managed to keep raising its payout during this rough period makes it stand out.
Still, like a lot of the ultra-high yielders, USD Partners is not perfect.
According to its most recent earnings report, the partnership generated $8.8 million of distributable cash flow in the second quarter of 2019. This marked a sizable decline from the $12.2 million it generated in the year-ago period. (Source: “USD Partners LP Announces Second Quarter 2019 Results,” USD Partners LP, August 5, 2019.)
Notably, the amount of distributable cash flow that USDP generated in the second quarter of this year was not enough to cover its cash distributions to unitholders during this period.
When asked about the partnership’s distribution coverage in the earnings conference call, Chief Executive Officer Dan Borgen said: “I think there is a couple of things to discuss there, one is the higher rates kick in Q3, so you will see an impact there and that will, I would say kind of push the distribution coverage to trend back towards kind of our target of 1.15× as well as Q4.” (Source: “USD Partners LP (USDP) CEO Dan Borgen on Q2 2019 Results – Earnings Call Transcript,” USD Partners LP, August 6, 2019.)
Bottom Line on USD Partners LP
So, where does that leave us?
Well, what we have here is an ultra-high-yielding stock determined to return cash to investors. USD Partners LP’s most recent quarterly distributable cash flow fell short of covering its payout. But if the partnership can bring its distribution coverage ratio back up to the 1.15× target, USDP stock would be worth a look for yield-seeking investors.