IPO Report: USD Partners LP (USDP)

USD Partners LP ($USDP) is based in Houston, TX, and scheduled a $177 million IPO on NYSE with a market capitalization of $204 million at a price range midpoint of $20 for Thursday, Oct. 9, 2014. SEC Documents

The full IPO calendar is available at IPOpremium

Manager, Co-managers: Citi, Barclays, Credit Suisse, BofA, and Merrill Lynch.

Joint-managers: Evercore Partners, BMO Capital Markets, Deutsche Bank, Goldman Sachs, RBC Capital Markets, and Janney Montgomery Scott.

USD Partners LP IPO Report

Overview

USDP is a fee-based, growth-oriented master limited partnership formed by US Development Group LLC to acquire, develop and operate energy-related rail terminals and other high-quality and complementary midstream infrastructure assets and businesses.

Valuation

Glossary

Conclusion

Neutral

Projected  5.75% payout

Terminalling contracted to capacity

Growth plan not clear

To put the conclusions and observations in context, the following is reorganized, edited and summarized from the full S-1 referenced above.

Business

USDP is a fee-based, growth-oriented master limited partnership formed by US Development Group LLC to acquire, develop and operate energy-related rail terminals and other high-quality and complementary midstream infrastructure assets and businesses.

Initial assets

USDP’s initial assets consist primarily of:

 (i) an origination crude-by-rail terminal in Hardisty, Alberta, Canada, with capacity to load up to two 120-railcar unit trains per day and

(ii) two destination unit train-capable ethanol rail terminals in San Antonio, Texas, and West Colton, California, with a combined capacity of approximately 33,000 barrels per day (bpd).

Operations

USDP’s rail terminals provide critical infrastructure allowing its customers to transport energy-related products from multiple supply regions to multiple demand markets.

In addition, USDP provides railcar services through the management of a railcar fleet consisting of 3,799 railcars, as of August 1, 2014, that are committed to customers on a long-term basis.

Cash flow

USDP generates substantially all of its operating cash flow by charging fixed fees for handling energy-related products and providing related services. USDP does not take ownership of the underlying commodities that USDP handle nor does it receive any payments from its customers based on the value of such commodities.

Rail transportation of energy-related products provides efficient and flexible access to key demand markets on a relatively low fixed-cost basis, and as a result has become an important part of North American midstream infrastructure.

USDP generates the vast majority of its operating cash flow in connection with providing crude oil terminalling services at its Hardisty rail terminal.

Substantially all of the capacity at USDP’s Hardisty rail terminal is contracted under multi-year, take-or-pay terminal services agreements with seven customers.

Furthermore, approximately 83% of the contracted utilization at USDP’s Hardisty rail terminal is with subsidiaries of five investment grade companies including major integrated oil companies, refiners and marketers.

Historical results

Historical results of operations do not include revenues from the Hardisty rail terminal as it was not operational until June 30, 2014.

Costs incurred in the Predecessor periods with respect to the Hardisty rail terminal are primarily related to pre-operational activities.

Terminalling Services Segment — six major agreements

The initial terms of six of the seven major agreements commenced between June 30, 2014 and August 1, 2014, and the initial term of the seventh agreement will commence on October 1, 2014.

USDP has terminal services agreements with seven high-quality counterparties or their subsidiaries: Cenovus Energy, Gibson Energy, Phillips 66, J. Aron & Company, Suncor Energy, Total and USD Marketing LLC.

Substantially all of the terminalling capacity at the Hardisty rail terminal is contracted under multi-year, take-or-pay terminal services agreements subject to inflation-based escalators.

 Furthermore, approximately 83% of the contracted utilization at the Hardisty rail terminal is contracted with subsidiaries of five investment grade companies, including major integrated oil companies, refiners and marketers.

All of these counterparties are obligated to pay a minimum monthly commitment fee and can load a maximum allotted number of unit trains. If a customer loads fewer unit trains in any given month than its maximum allotted number, that customer will pay us a minimum monthly payment commitment fee but will also receive a six-month credit that will allow our customers to load the unutilized unit trains, subject to availability.

USDP will receive a per-barrel fee on any volumes handled in excess of the customers maximum allowed volume.

Each of the terminal services agreements with the Hardisty rail terminal customers has an initial contract term of five years.

Fleet Services Segment

USDP provides fleet services for a railcar fleet consisting of 3,799 railcars as of August 1, 2014, of which 988 railcars are in production or on order. USDP does not own any railcars.

As of August 1, 2014, USDP's master fleet services agreements dedicated to customers of the Hardisty rail terminal had a weighted-average remaining life of approximately 7.0 years with an overall weighted-average life of 5.5 years if agreements dedicated to customers of previously sold terminals are included.

Growth plan

USDP intends to acquire high-quality and complementary midstream infrastructure assets and businesses from both USD as well as third parties.

At the closing of this offering, USDP will enter into an omnibus agreement with USD and USD Group LLC, pursuant to which USD Group LLC will grant us a right of first offer on the Hardisty Phase II and Hardisty Phase III projects for a period of seven years after the closing of this offering.

Competition

With respect to its Hardisty rail terminal, USDP believes that it will face competition from other logistics services providers, such as pipelines and other rail terminalling service providers, for barrels of crude oil in excess of the minimum volume commitments under its terminal services agreements with customers.

If its customers choose to ship excess crude oil via alternative means, USDP may only receive the minimum volumes through its Hardisty rail terminal, which would cause a decrease in its revenues.

With respect to USDP’s San Antonio and West Colton rail terminals, USDP faces competition from other terminals and trucks that may be able to supply end-user markets with ethanol and other biofuels on a more competitive basis, due to terminal location, and price, versatility and services provided.

Both facilities are served by the Union Pacific (UP) Railroad. In the Southern California market, USDP competes directly with Burlington Northern Santa Fe (BNSF) served ethanol facilities in Fontana and Carson, as well BNSF served terminals in the San Diego area.

A combination of rail freight and trucking economics, which make up the largest share of the value chain, make it very difficult to compete with other facilities in this market on terminalling throughput fees alone.

In the San Antonio market, USDP also competes with a BNSF served facility, although its UP served facility is closer to the San Antonio metro area allowing advantaged trucking rates for certain end-user customers.

 With respect to the railcar fleet services USDP provides, it may face competition from other providers of railcars in excess of the railcars currently contracted for under its master fleet services agreements.

This competition may limit USDP’s ability to increase the number of railcars under contract, and thus, limit its ability to increase its revenues.

Furthermore, USDP may face competition from other parties interested in procuring railcars equipped to carry crude oil.

USDP believes, however, that with its strong relationships with leaders in the railcar supply industry such as CIT Rail, Union Tank Car Company and Trinity Industries, USDP will be able to continue to procure railcars on more advantageous terms, with shorter lead times than its competitors.

5% shareholders pre-IPO

US Development Group LLC      13.4%

USD Holdings, LLC       45.5%

Energy Capital Partners III, LP

Energy Capital Partners III-A, LP             23.7%

Energy Capital Partners III-B, LP             15.0%

Energy Capital Partners III-C, LP 9.8%

Dividend Policy

The board of directors of USDP’s general partner will adopt a cash distribution policy pursuant to which USDP intends to distribute at least the minimum quarterly distribution of $0.2875 per unit ($1.15 per unit on an annualized basis) on all of its units to the extent USDP has sufficient available cash after the establishment of cash reserves and the payment of its expenses, including payments to its general partner and its affiliates.

Use of proceeds

USDP intends to use the $165 million in proceeds from its IPO as follows:

to make a cash distribution to USD Group LLC of $98.0 million and to reimburse USD Group LLC for $7.5 million of fees and expenses related to this offering;

to repay $97.8 million of indebtedness under USD’s current credit facility; and

to pay $2.0 million of fees and expenses in connection with its new senior secured credit agreement, which will be comprised of a revolving credit facility and a term loan.

Disclaimer: This USDP IPO report is based on a reading and analysis of USDP’s S-1 filing, which can be found here, and a separate, independent analysis by IPOdesktop.com. There are no unattributed direct quotes in this article.