Sprague Resources: Hope For The 17% Yield But Brace For Half Or Less

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About: Sprague Resources LP (SRLP)
by: Daniel Thurecht
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Daniel Thurecht
Long-term horizon, Contrarian, Oil & Gas, industrials
Summary

Sprague Resources managed to sustain their very high yielding distributions despite the turmoil in the first half of 2020.

When looking ahead unitholders should hope for this to continue but realistically, it would be prudent to brace for their distributions to at least be halved.

The first issue is their lumpy operating cash flow and weak distribution coverage that leaves them reliant on external funding.

The next issue is their alarmingly very high leverage that is combined with weak liquidity, which requires urgent deleveraging and continued support from financial institutions.

Given this situation, I believe that a neutral rating is appropriate whilst sitting and waiting until this highly likely distribution reduction has eventuated.

Introduction

When turmoil struck financial markets earlier in 2020 Sprague Resources (SRLP) bucked the trend of other Master Limited Partnerships and actually sustained their distributions and thus now still offer a very high