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Portsmouth, NH,-based Sprague Resources LP (NYSE:SRLP) scheduled a $170 million IPO with a market capitalization of $403 million at a price range midpoint of $20, for Friday, October 25, 2013.

Four IPOs are scheduled for this week. The full IPO calendar can be found at IPOpremium.

S-1 filed Oct. 15, 2013.

Manager, Joint Managers: Barclays, JPMorgan and BofA Merrill Lynch

Co-Managers: BMO Capital Markets, Raymond James, Janney Montgomery Scott, BNP Paribas, Natixis, RBS, Societe Generale

Summary

Sprague is a mid-stream company engaged in the purchase, storage, distribution and sale of refined petroleum products in the Northeast.

The predecessor was founded in 1870 and has stored, distributed and marketed petroleum-based products for over 50 years.

Valuation

On the IPO there will be an immediate tangible book value per share dilution of $20, page 51.

Valuation Ratios

IPO Mrkt

Distribution

Price/

Price /

Price /

% offered

yr ended 6/13

Cap (MM)

Yield

EBITDA

BkVlue

TanBV

in IPO

Sprague Resources LP

$403

8.3%

6.7

7.8

-1000.0

42%

OCI Resources LP (NYSE:OCIR) @$21.20

$423

9.4%

4.0

4.1

4.1

Hi-Crush Partners LP (NYSE:HCLP) @ $30

$880

6.5%

13.4

6.2

13.1

Glossary

SRLP lacks a growth plan, except to grow as the market grows. On a price-to-value basis it is more expensive than OCIR and HCLP. Its yield and price-to-EBITDA are about in the middle of the range.

SRLP believes the September 2013 quarter pro forma disributable cash will be less than the September 2012 results (see below). That's a negative, needless to say.

Conclusion

The rating on SRLP is neutral to negative at the price range mid-point of $20, based on an expected yield of 8.3%.

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

Business

SRLP is one of the largest independent wholesale distributors of refined products in the Northeast United States based on aggregate terminal capacity.

SRLP owns and/or operates a network of 15 refined products and materials handling terminals strategically located throughout the Northeast that have a combined storage capacity of approximately 9.1 million barrels (which excludes approximately 1.5 million barrels of storage capacity in tanks not currently in service) for refined products and other liquid materials, as well as about 1.5 million square feet of materials handling capacity.

The predecessor of SRLP was founded in 1870 and has stored, distributed and marketed petroleum-based products for over 50 years.

Recent developments

Based on preliminary information to date, SRLP expects lower pro forma adjusted gross margin for the three months ending September 30, 2013, as compared to the three months ended September 30, 2012.

SRLP believes that the pro forma distributable cash flow for the twelve months ending September 30, 2013, will be lower than the pro forma distributable cash flow for the twelve months ended June 30, 2013.

However, SRLP does not expect results of operations for the quarter ending September 30, 2013, to have a material impact on forecasted distributable cash flow necessary for SRLP to pay the minimum quarterly distribution on all units for the twelve months ending September 30, 2014.

Refined Products

The oil industry is commonly divided into three sectors: (1) the "upstream" sector, which is primarily comprised of the exploration and production of crude oil; (2) the "downstream" sector, which includes the refining of crude oil along with all other related activities through sales of refined products to end users; and (3) the "midstream" sector, which is often combined with downstream and focuses largely on services relating to the downstream sector such as storage, transportation and distribution of crude oil and refined products.

The United States has an extensive refinery system that produces the bulk of the refined products used domestically. Although the specific configuration of refineries varies significantly, in general, the primary feedstock to most oil refineries is a mix of crude oils, with the output being a range of refined products of varying qualities.

Finished products include (1) "light oils" such as gasoline and distillates, including heating oil, kerosene, aviation fuel and diesel, and (2) "heavy oils" such as residual fuel oil and asphalt. U.S. refiners generally produce more product than is required to meet their own direct marketing obligations.

Although refining is a key part of the refined product supply infrastructure, the Northeast market in which SRLP operates has a relatively small portion of the total U.S. refining capacity. This results in the Northeast being in a deficit petroleum products position, which is particularly evident in the NE/NY region where there are no operating refineries. In contrast, the U.S. Gulf Coast region, represented in part by Petroleum Administration for Defense District, or PADD, has a substantial surplus of refining capacity and is a key source of products to meet demand requirements elsewhere in the United States, including the Northeast.

Minimum quarterly distribution

SRLP intends to make a minimum quarterly distribution of $0.4125 per unit per complete quarter, or $1.65 per unit per year, which is a projected 8.3% annual return at the price range mid-point of $20.

Incentive distribution rights

First, to all unitholders, pro rata, until each unitholder receives a total of $0.474375 per unit for that quarter (the "first target distribution");

Second, 85.0% to all unitholders, pro rata, and 15.0% to the holders of incentive distribution rights, pro rata, until each unitholder receives a total of $0.515625 per unit for that quarter (the "second target distribution");

Third, 75.0% to all unitholders, pro rata, and 25.0% to the holders of incentive distribution rights, pro rata, until each unitholder receives a total of $0.61875 per unit for that quarter (the "third target distribution"); and

Thereafter, 50.0% to all unitholders, pro rata, and 50.0% to the holders of incentive distribution rights, pro rata.

Competition

SRLP encounters varying degrees of competition based on product type and geographic location in the marketing of its refined products. In its Northeast market, SRLP competes in various product lines and for a range of customer types. The principal methods of competition in SRLP's refined products operations are pricing, services offerings to customers, credit support and certainty of supply.

Competitors of SRLP's natural gas sales operations generally include natural gas suppliers and distributors of varying sizes, financial resources and experience, including producers, pipeline companies, utilities and independent marketers. The principal methods of competition in SRLP's natural gas operations are in obtaining supply, pricing optionality for customers and effective support services, such as scheduling and risk management. SRLP believes that its sizable market presence and strong customer service and offerings provide it with a competitive advantage in marketing natural gas in the areas in which it operates.

In SRLP's materials handling operations, it primarily competes with public and private port operators. Although customer decisions are substantially based on location, additional points of competition include types of services provided and pricing. SRLP believes that its ability to provide materials handling services at a number of its refined products terminals and its demonstrated ability to handle a wide range of products provides it a competitive advantage in competing for products-related handling services in the areas in which it operates.

5% stockholders pre-IPO

SRLP is a spin-off of Axel Johnson Inc.

Use of proceeds

SRLP expects to net $156 million from its IPO. Proceeds are allocated to repay debt.

Disclaimer: This SRLP IPO report is based on a reading and analysis of SRLP'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.

Source: IPO Preview: Sprague Resources LP