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

Sprague Resources: Very High Yield, But Still Very Risky After Disappointing End To 2020

Mar. 08, 2021 3:22 PM ETSprague Resources LP (SRLP)7 Comments
DT Analysis profile picture
DT Analysis


  • Sprague Resources once again sustained their distributions for another quarter but they remain very risky.
  • Despite seeing good fortune during most of 2020, this seems unlikely to repeat again during 2021.
  • Their operating cash flow turned negative during the fourth quarter of 2020 and even without working capital movements, it was still disappointing very low.
  • It seems likely that without further good fortune, their very high leverage and weak liquidity will see a significant distribution reduction during 2021.
  • Given their very risky distributions offsetting the appeal of their very high yield, I believe that my neutral rating is appropriate.


Even though Sprague Resources (NYSE:SRLP) managed to sustain their distributions amidst the turmoil of 2020, this feat was primarily accomplished due to temporary good fortune, as my previous article discussed. A follow-up analysis is provided within this article that reviews the sustainability of their very high 14% distribution yield during 2021 along with their recently released fourth quarter of 2020 results.

Executive Summary & Ratings

Since many readers are likely short on time, the table below provides a very brief executive summary and ratings for the primary criteria that was assessed. This Google Document provides a list of all my equivalent ratings as well as more information regarding my rating system. The following section provides a detailed analysis for those readers who are wishing to dig deeper into their situation.

Sprague Resources ratings

Image Source: Author.

*There are significant short and medium-term uncertainties for the broader oil and gas industry, however, in the long-term they will certainly face a decline as the world moves away from fossil fuels.

Detailed Analysis

Sprague Resources cash flows

Sprague Resources notes 1

Image Source: Author.

Instead of simply assessing distribution coverage through distributable cash flow, I prefer to utilize free cash flow since it provides the toughest criteria and best captures the true impact on their financial position. The main difference between the two is that the former ignores the capital expenditure that relates to growth projects, which given the very high capital intensity of their industry can create a material difference.

On the surface, it initially appears that 2020 was a blockbuster year with their operating cash flow surging towards approximately equalling their four-year high at $154m, which stands in stark contrast to the negative $65m they generated during 2019. This ultimately left with $136m of free cash flow, which was ample to cover their distribution payments and thus provide very strong coverage at 201.82%.

This article was written by

DT Analysis profile picture
I am no longer active, as I am taking a hiatus from finance to pursue business ventures in other sectors.  I hope that my analysis was helpful to investors across the years, thank you.

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

Comments (7)

LovesCoffee profile picture
Bought this last year, enjoyed a few dividend payouts and sold with a nice 33% capital appreciation. One of my few successes, now I'm hoping they do, indeed, cut the dividend so I can buy back in at a lower price. The only problem is that people have been predicting a cut for years but, even with a DCF coverage of .5 or so, they keep paying the divvy. Time will tell.

I bought this years ago when it was actually quite a spiffy little company with a) great distribution coverage, and b) low leverage. But they did acquisition after acquisition, steadily increasing debt and unit count, and every time trotted out a powerpoint about how "accretive" the deal was, but as author notes, the incremental cash flow never quite seemed to materialize, leaving an ever-larger base of units for the distribution.
But the author is missing the trigger for the distribution cut -- IMO the first step will be to have SRLP buy out the incentive distribution rights by issuing to the parent a huge number of units, THEN they'll cut the distribution -- they need the current high distribution to justify the biggest possible buyout price. This is the standard playbook that GPs have followed in the past to "simplify" and get rid of IDRs -- see Enbridge, etc. At that point they'll own so many of the units that they can buy in the rest for a song, like they tried to do last year for $13. I don't think there's any way they end 2021 as a public company.
I think you missed the IDR reset. In February, the GP agreed to reset the IDR thresholds at much higher levels, and SRLP issued 3.1 million new units to them to make up for the lost IDR payments. Today, the IDRs have no intrinsic value, only the opportunity for IDR payments in the future if SRLP can raise the distribution. And the old IDRs were in the 50/50 splits. Under the new thresholds the distribution has to exceed $ 1.00 per quarter before the 50/50 splits are reached.

After receiving the 3.1 million new units, the GP owns 61% of all the common units. And I agree with you that a buyout is coming. But not until operating results decline a bit, and (probably) the distribution is cut.
@jrad52 I ditched it. I'll keep an eye on it, wait for the cut divvy, buy when everyone else is selling. And make a fortune. LOLOL.
Yep, the high yield bothers me. I BOT in January along with 3 other mid-streams. All are significantly higher than when I got them. Then SRLP reports the other day and tanks. I will probably ditch this thing. Anytime yields get above, oh, say, 10.5% or so, I think Mr. Market is telling me something. I think the situation dictates that distribution gets cut.
Have followed SRLP for years after being alerted to it by Rida Morwa for its high yield, and was intrigued by its below-the-radar New England fuels and asphalts niche and savvy managers who play in this unusual little sandbox. But I never invested in it, thinking it was a little too arcane and unreliable for earnings, and so have watched with surprise as it went from $10 to now $19, wondering how that happened.

Thanks for your report, which explains the sudden unexpected results for the SRLP, and the rather difficult circumstances SRLP now faces. I sure would be bailing if I owned it at this point.

One question: What impact is the swift rise in oil prices going to have on SRLP? Is that a positive or one more weight?
One other thing to worry about - the IDR reset.

SRLP has maintained its distribution in recent years, which maximized the IDR payout. In February, the GP elected to reset the IDR thresholds, which basically eliminates any IDR payments at the current distribution level. In exchange for giving up the old IDR threshold, SRLP issued 3.1 million new common units to the GP, which pay an amount of distributions equal to the old IDR payout.

Why is this a problem? Because under the old IDR trigger points, the GP would suffer disproportionately from any cut in the distribution. Now that they have replaced the IDR payment with "normal" common unit distributions, they will suffer less from any cut in the distribution.

The GP tried to buy out the public unitholders at a bargain price last year and the attempt was rejected. Now, if SRLP cuts the distribution and the price tanks, the GP might be able to try again. Only this time, they will have to buy 3.1 million fewer units.
Disagree with this article? Submit your own. To report a factual error in this article, . Your feedback matters to us!
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.