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Terminal Velocity

By Peter Staas on Dec. 11, 2013

Sprague Resources LP went public on Oct. 24, raising $153 million in proceeds. In the subsequent month and a half of trading, the stock has failed to catch a bid, giving up about 3 percent of its value.

The newly listed MLP is one of the largest independent wholesale distributors of refined products in the Northeast; its network of 15 terminals boasts a combined storage capacity of 9.1 million barrels and 1.5 million square feet of materials-handling capacity.

Sprague Resources operates three primary business segments:

  • Refined Products (57 percent of adjusted gross margin in first half of 2013), which purchases, stores and markets distillate, gasoline and residual fuel oil to more than 1,700 wholesale, commercial and industrial customers;
  • Natural Gas (26 percent), which purchases stores and markets this fuel to more than 5,000 commercial and industrial customer locations across 10 states in the Northeast and Mid-Atlantic; and
  • Materials Handling (15 percent), which offloads, stores and prepares for delivery a variety of customer-owned products, including asphalt, salt, gypsum, coal, pulp and heavy equipment.

The partnership’s refined products and natural-gas segments take title to the commodities that they market, a risk that the firm seeks to mitigate through an active hedging program. In contrast, Sprague Resources’ materials-handling business generally operates under multiyear contracts.

Going forward, Sprague Resources will rely on acquisitions to drive distribution growth and offset gradually declining demand for refined products in the Northeast.

The partnership’s general partner, Sweden-based Axel Johnson, acquired the remaining 50 percent of its Kildair joint venture and 1.5 million barrels of additional petroleum storage capacity from an adjacent Hydro Quebec facility.

This subsidiary recently signed a five-year, take-or-pay crude-oil transloading and storage with an unnamed integrated oil company–likely Suncor Energy (TSX: SU, NYSE: SU) or Royal Dutch Shell (LSE: RDSA, RDSB; NYSE: RDS A, RDS B)–that will involve “extensive” improvements to the terminal.

Once the first phase of these upgrades is completed in April 2014, we wouldn’t be surprised if Axel Johnson were to drop down an equity interest in this facility to Sprague Resources, giving the MLP exposure to rising volumes of crude oil arriving from Western Canada and higher run rates at Quebec’s refineries.

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