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IPO Analysis: USD Partners LP (NYSE: USDP)

By Elliott H. Gue on Nov. 18, 2014

SD Partners’ distribution and growth prospects hinge primarily on the MLP’s rail-loading terminal in Hardisty. This critical oil hub is the pricing point for Western Canada Select (WCS), a blend of bitumen (the raw product from the oil sands) with sweet synthetic crude oil and condensate.

Substantially all the volumes that flow through the MLP’s Hardisty rail terminal come from a pipeline and storage facilities owned by Gibson Energy (TSX: GEI, OTC: GBNXF).

The MLP has an agreement with Gibson Energy that makes this rail terminal the exclusive means by which crude oil from its partner’s storage facilities can be shipped via unit train.

Accordingly, Gibson Energy’s plans to expand this capacity to 6.6 million barrels from 4.3 million barrels bodes well for USD Partners; the MLP’s sponsor continues to gauge customer interest in expanding the Hardisty terminal’s loading capacity to up to five 120-railcar unit trains per day.

This project would involve two phases, the first of which could come onstream in late 2015 or early 2016 if USD Partners’ sponsor can secure the necessary commercial commitments and execute the project without any delays. The MLP has the right of first offer on these proposed expansions for seven years after its IPO.

However, recent trends in regional price differentials could threaten to derail these growth plans.

Over the past few years, WCS crude oil has traded at a wide discount to West Texas Intermediate (WTI) and heavier varietals from Mexico, Colombia and Venezuela. This price spread reflected two factors: Increasing competition from surging shale oil production and insufficient pipeline capacity to move Canadian volumes to the US market, especially the Gulf Coast.

The majority of Canada’s heavy crude oil heads to the US Midwest, where refineries can process up to 1.5 million barrels per day. But incoming volumes have overwhelmed this capacity, despite an expansion to BP’s (LSE: BP, NYSE: BP) Whiting refinery in Illinois.

Gulf Coast refineries have ample capacity to run heavy crude oil but continue to source the preponderance of these barrels from Latin America; insufficient southbound pipeline capacity in the Midwest limited access to discounted WCS.

However, several developments have increased the flow of crude oil from Alberta’s oil sands from to the Gulf Coast, starting with the reopening of the 100,000 barrel-per-day Canexus rail terminal at Bruderheim and the start-up of USD Partners’ loading facility. Additional crude-by-rail capacity will come onstream in 2015.

And in October, Enbridge (TSX: ENB, NYSE: ENB) began filling a 600,000 barrel-per-day expansion to its Flanagan South pipeline, which runs from Chicago to Cushing, Oklahoma, the official pricing hub for WTI crude oil.

In conjunction with the December start-up of Flanagan South, Enbridge and Enterprise Products Partners LP’s (NYSE: EPD) Seaway Twin pipeline will carry heavy crude oil from Cushing to Houston.

Improved market access for the growing production from Alberta’s oil sands has narrowed the discount at which WCS trades to WTI and Mexican Maya, a heavier imported varietal that still figures prominently in refiners’ feedstock slates.

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