Entering text into the input field will update the search result below

Sprague Resources LP And The Dangers Of MLPs During Bear Markets

May 04, 2020 10:59 AM ETSprague Resources LP (SRLP)DKL, GPP, HEP, MPLX, PBF8 Comments
Tristan R. Brown profile picture
Tristan R. Brown
2.39K Followers

Summary

  • Downstream logistics MLP Sprague Resources LP recently received an unsolicited buyout offer from its controlling sponsor and GP that represents a substantial discount to its IPO price.
  • Many of the MLP's minority unitholders will find themselves locked into losses given the coronavirus-induced downturn by its unit price.
  • The buyout offer provides a timely reminder to MLP investors of the unique risks that MLPs provide alongside hefty yields.
  • Investors who have joined in the recent downstream logistics MLP rally should keep these risks in mind.

Income investors often find it hard to avoid downstream logistics MLPs due to the large distributions that they offer. Distribution yields in the high single- to low double-digits have been especially attractive in the low interest rate environment that has prevailed for more than a decade. As Sprague Resources LP (NYSE:SRLP) recently demonstrated, though, MLPs also provide investors with a unique set of risks that can force large losses on them during bear markets such as the current one.

Sprague Resources LP is a wholesale supplier of energy products, primarily refined fuels but also natural gas, in the Northeast U.S. As a MLP the company passes its cash flows to investors in the form of a quarterly distribution. This distribution has experienced strong growth since it was first released in 2014, rising from $0.28/unit to $0.67/unit in 2018 on steady refined products demand (see figure).

Downstream MLPs are distinct from upstream MLPs in that the former benefit from the type of low energy price environment that has prevailed since late 2014. Whereas low energy prices can result in supply and throughput disruptions for upstream MLPs, those same low prices result in higher demand and throughput volumes for downstream MLPs. Sprague Resources LP easily outperformed the S&P 500 index on a total return basis during its first five years as an independent entity (see figure).

Conditions have changed rapidly in response to the COVID-19 pandemic, however. The MLP's unit price has fallen by as much as 39% just in 2020 to date as the rollout of stay-at-home orders across the U.S. has caused refined products consumption to collapse. East Coast refiners have greatly reduced their utilization rates in response, limiting the MLP's access to refined products on the supply side (see figure). Finally, major Northeastern states such as New York have

This article was written by

Tristan R. Brown profile picture
2.39K Followers
My articles do not represent investment advice. Readers should perform their due diligence before investing in any security or fund that is mentioned by my articles.

Analyst’s Disclosure: I/we 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

Recommended For You

To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.