Sprague Resources IPO Yields 8+%

Oct.22.13 | About: Sprague Resources (SRLP)

Sprague Resources LP (NYSE:SRLP), a refined petroleum products firm with principal offices located in Portsmouth, New Hampshire plans to raise $170 million in its upcoming IPO. The firm will offer 8.5 million shares at an expected price range of $19.00-$21.00. If the offering reaches the midpoint of that range at $20.00 per share, SRLP will command a market value of $403 million.

SRLP filed on July 27, 2011; the offering is expected the week of October 21, 2013.
Joint Bookrunners: Barclays, J.P. Morgan, BofA Merrill Lynch
Co-Managers: BMO Capital Markets, Raymond James, Janney Montgomery Scott, BNP Paribas, Natixis, RBS, Societe Generale

Sprague Resources, LP is in the business of purchasing, storing, distributing and selling refined petroleum products and natural gas, along with storage and handling services for a wide variety of products. The firm operates 15 refined products and material handling terminals in the northeastern United States; these facilities have a combined storage capacity of approximately 9.1 billion barrels in service. The firm also has access to some fifty other third-party terminals through which it sells or distributes refined petroleum products.

SRLP offers the following figures in its S-4 balance sheet for the six months ending June 30, 2013:
Net Sales: $2,466,773,000
Net Income: $11,615,000
Gross Margin: $98,909,000
Total Assets: $834,145,000
Total Debt: $449,967,000
Total Stockholders'/Partners'/Members' Equity: $133,498,000

SRLP's S-4 stresses the firm's intent to pay a minimum quarterly distribution of $0.4125 per unit ($1.65 annualized). Though this is contingent upon the firm having sufficient distributable cash flow, it seems likely that it will be able to generate quite a bit of distributable cash - SRLP recently declared and paid a dividend of $17.5 million. However, for the quarter ending June 30, 2013, the firm would not have had sufficient distributable cash to make full quarterly payments. If the IPO hits the midpoint of its expected price range, the minimum payments would constitute a healthy 8.25% annual yield which is not as good as the recent OCI Resources (OCIR) IPO. See http://seekingalpha.com/article/1680482-buy-the-oci-resources-ipo-this-week and http://seekingalpha.com/article/1707102-11-high-yielding-oci-resources-quiet-period-expiring

We are neutral to positive on SRLP and we are hoping it prices below or at the lower end of the $19 to $21 range.

The firm appears to be in good health, having posted strong recent income and gross margin numbers, and its recent purchase of a new deep water facility indicates an eye towards growth. The primary selling point of this IPO certainly must be the quarterly payments offers, which should be equivalent to approximately an eight percent annual yield depending on the IPO's pricing; even if the firm is unable to pay the full quarterly yields, SRLP still represents an income-generating stock that will likely grow in value. Moreover, the firm has stated its willingness to borrow money, when possible, to cover its quarterly payments; since the business is seasonal, this is a likely eventuality in the second and third quarters. Though the firm's success will certainly vary with the petroleum market, it is at least somewhat shielded from this risk by the diversity of non-petroleum-related services that it also offers.

SRLP, like other petroleum-related firms, faces risk of supply chain disruption if its foreign oil providers are unable to perform as expected. Political events in the turbulent Middle East also may affect the price and availability of oil.

SRLP faces competition from other privately owned facilities in the Northeast, the St. Lawrence Seaway, and the Canadian Maritimes. Some of these competitors are significantly better capitalized than SRLP and have access to superior resources.

David C. Glendon has served as President and CEO of SRLP's general partner since 2011. Mr. Glendon has previously served as a partner and global account manager at Monitor group, and was a founder and managing director of Monitor Equity Advisors. Mr. Glendon holds a Master's degree in Business Administration from the Stanford Graduate School of Business.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This article was prepared partly on the company's public filings. Investors should read the S-4 and consult with their financial adviser before investing.