USD Partners (USDP) is currently undervalued relative to future cash flows and dividend distributions. I do a quick analysis of what’s currently happening.
What is USD Partners (USDP)?
USD PARTNERS LP, also called USD Partners, is fee-based limited partnership company, which engages in the acquisition, development, and operation of midstream infrastructure and logistics solutions for crude oil, biofuels, and other energy-related products. It operates through the following segments: Terminalling Services, and Fleet Services. The Terminalling Services segment includes minimum monthly commitment fees under multi-year take-or-pay contracts to load and unload various grades of crude oil into and from railcars, as well as fixed fees per gallon to transload ethanol from railcars. The Fleet Services segment provides customers with leased railcars and fleet services related to the transportation of liquid hydrocarbons and biofuels by rail on a multi-year and take-or-pay basis. The company was founded by Michael R. Curry on June 5, 2014 and is headquartered in Houston, TX.
The case for USD Partners (USDP)
The company recently diverted a large part of its distribution cash flows ($0.37 quarterly distribution to $0.11 quarterly) to driving down debt and funding expansion projects. The company wants to drive down debt by $20,000,000 to $25,000,000 on an annualized basis moving forward and has stated that the decrease in dividend payout is in absolutely no way related to deteriorating business quality. I completely agree with this sentiment.
The diversion of these cash flows to strengthening the company’s balance sheet should drive improved shareholder value in the long-term at the cost of some short-term pain. My assumption is that this 70% decrease in dividend payout, along with uncertainty surrounding contract renewals, are the driving factors behind the stock going from $10.00+ down to $3.00.
I believe that over the next few years, the share price will correct itself as the company executes on its expansion plans and greatly improves its balance sheet. Both of these factors should lead to improved distribution cash flows and a higher dividend payout over time. Even if the situation as described above does not pan out, you would still be receiving an annualized dividend yield of 14% with the company currently paying out a quarterly distribution of $0.11 per share.
If you take that one step further and assume that a majority of the company’s contracts will not be renewed (very unlikely) in the coming years and the company will only be able to retain 30% of its 2019 distribution cash flows (2019 Distribution Cash Flows = $37,299,000, 30% of 2019 (70% decrease) = $11,189,700), you are still left with a cash flow yield of roughly 13% at a market cap of less than $85,000,000.
At $3.15 per share, you get all of the above while not even having to take into consideration positive growth assumptions. You are solely banking on management’s ability to keep the company running at 30% of what it is currently producing. Any upside from there is all added value. At $4.00 per share and below, I believe USDP is a great long-term hold.
Should you buy shares in USD Partners (USDP)?
Shares of USD Partners (USDP) appear to be a very good investment option, the Money Midnight Indicator is expecting its price to increase considerably in the next several years. The majority of the metrics point to this investment being highly attractive.