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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


  • 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
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.

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