USD Partners: I Fear Something Bad Might Be Coming

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Introduction

Following the seemingly non-existent advancement USD Partners (NYSE:USDP) was making lining up caller contracts backmost successful precocious 2022, it appeared their distributions could beryllium suspended, arsenic my previous article warned. Whilst they subsequently amazed by maintaining their distributions, their fundamentals continued deteriorating and I spot assorted informing signs flashing and frankincense arsenic a result, I fearfulness thing atrocious mightiness beryllium coming.

Coverage Summary & Ratings

Since galore readers are apt abbreviated connected time, the array beneath provides a little summary and ratings for the superior criteria assessed. If interested, this Google Document provides accusation regarding my standing strategy and importantly, links to my room of equivalent analyses that stock a comparable attack to heighten cross-investment comparability.

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Detailed Analysis

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As a reminder, aft their Hardisty South Terminal acquisition during the 2nd 4th of 2022, their fiscal statements were recast arsenic the acquisition represented a concern operation betwixt entities nether communal control. When presenting information wrong this analysis, their humanities results for 2021 and earlier person been near original, whereas their results for 2022 are evidently recast.

In the lead-up to the merchandise of results for the 4th fourth of 2022, their currency travel show was precocious connected the database of priorities to reappraisal pursuing my erstwhile investigation flagging their currency procreation arsenic an country of concern. Once opened, it showed their operating currency travel ended the twelvemonth astatine $37.2m and frankincense modestly supra the $29m they generated during the archetypal 9 months.

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If viewing their operating currency travel connected a quarterly ground and excluding moving superior movements, it appears amazingly bully with an underlying effect of $10.6m during the 4th fourth of 2022, which is either amended oregon if not, astir connected par with astir of their erstwhile results successful caller past since astatine slightest the opening of 2021. That said, arsenic readers of my erstwhile investigation whitethorn recall, determination is not bully quality for unitholders lurking deeper beneath the surface.

Similar to the 3rd 4th of 2022, their operating currency travel during the 4th fourth saw a sizeable information of involvement complaint swaps closed out. As a result, this saw different $8.8m boost via the colony of derivative contracts recorded connected their currency travel statement. If removed from their underlying operating currency travel of $10.6m, it leaves what I would telephone their halfway operating currency travel astatine lone a tiny $1.8m and frankincense adjacent little than the $3m they saw during the 3rd quarter, arsenic per my antecedently linked article. Very worryingly, this shows their assets are struggling to make currency pursuing the nonaccomplishment of important contracts arsenic outlined wrong my earlier article. Despite it present being astir six months later, they person inactive made nary tangible signs of advancement replacing these contracts with lone generalized statements, arsenic per the commentary from absorption included below.

“With Canadian retention utilization levels presently astatine the precocious extremity of the humanities averages and the industry’s existent expectations astir maturation successful Canadian lipid sands accumulation successful 2023 and 2024, we are focused connected renewing, extending, oregon replacing agreements that expired during 2022 and those that are acceptable to expire this year.”

-USDP Partners Fourth Quarter Of 2022 Results Announcement.

Whilst these contracts are inactive beforehand and halfway connected their minds, their connection does not bespeak thing is astir to alteration with nary tangible signs of caller contracts forthcoming. If anything, it is really looking worse arsenic they mentioned much are acceptable to expire during 2023 and frankincense if the ones from 2022 are proving hard to replace, the past happening they request is adjacent much spare capableness idled.

The colony of derivative contracts fundamentally saved the time frankincense far, though they look to beryllium efficaciously moving out. These are accounted for wrong their existent and non-current assets connected their equilibrium sheet, which are collectively down to lone $3.3m pursuing the 4th fourth of 2022. Unless thing changes quickly, I expect to spot their operating currency travel autumn disconnected a cliff during the archetypal and 2nd quarters of 2023, thereby making a ample organisation chopped precise likely, if not adjacent a suspension fixed their subsequently discussed liquidity pressures that already saw their sponsor elite to forego their latest quarterly distribution, arsenic per the commentary from absorption included below.

“ …in bid to enactment the Partnership’s existent liquidity presumption during this recontracting cycle, our Sponsor decided to waive its close to the 4th fourth organisation connected its 17.3 cardinal units without impacting the organisation to the remaining unitholders…”

-USDP Partners Fourth Quarter Of 2022 Results Announcement (previously linked).

It is uncommon to spot a sponsor electing to waive their close to distributions, arsenic a important portion of the mediocre estimation that Masted Limited Partnerships endure stems from the actions of their sponsors that favour themselves astatine the disbursal of number unitholders. Whilst lone my subjective view, I nevertheless consciousness the mode they talk astir their distributions is lining up a chopped oregon suspension for each of their unitholders rather soon, arsenic per the commentary from absorption included below.

“The Partnership’s committee determined to support the organisation unchanged from the anterior 4th and to measure the organisation connected a quarterly ground going guardant and volition instrumentality into information updated commercialized progress, including the Partnership’s quality to renew, widen oregon regenerate its lawsuit agreements astatine the Hardisty and Stroud Terminals, existent marketplace conditions, and management’s expectations regarding aboriginal performance.”

-USDP Partners Fourth Quarter Of 2022 Results Announcement (previously linked).

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Thanks to the boost from their derivative settlements during the 4th fourth of 2022, their nett indebtedness dropped somewhat to $208.3m versus its erstwhile level of $212m pursuing the 3rd quarter. Since they look to beryllium efficaciously retired of derivatives, this means their nett indebtedness is precise apt to statesman climbing during 2023, unless they rapidly marque advancement connected caller contracts oregon suspend their distributions, the second of which seems acold much apt close now. Since determination was lone a tiny alteration connected this beforehand since conducting the erstwhile analysis, it would beryllium redundant to reassess their leverage oregon indebtedness serviceability successful detail, particularly arsenic neither are the superior topics close now.

The 2 applicable graphs are inactive included beneath to supply discourse for immoderate caller readers, which shows their leverage is erstwhile again precise high, rather unsurprisingly. To this point, their nett debt-to-EBITDA of 6.60 and nett debt-to-operating currency travel of 5.59 are some materially supra the applicable threshold of 5.01. Concurrently, their indebtedness serviceability remains unsafe with involvement sum of lone 1.12 erstwhile compared against their EBIT and whilst a examination against their operating currency travel sees a capable effect of 3.49, I similar to justice connected the worse side. If funny successful further details regarding these topics, delight notation to my antecedently linked article.

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When conducting their erstwhile analysis, their precise anemic liquidity was besides flagged arsenic an country of interest and frankincense adjacent much captious than different issues. This is present much easy evident pursuing the 4th fourth of 2022 with their existent and currency ratios some plunging to respective results of 0.06 and 0.03 versus their erstwhile respective results of 0.92 and 0.46 pursuing the 3rd quarter, which stems from their recognition installation maturing successful November 2023 and frankincense arsenic a result, present being accounted for wrong their existent liabilities. Worryingly, this holds the entirety of their $214.1m of indebtedness and truthful absent of refinancing, they person nary prime but to record for bankruptcy since repayment is retired of the question, nor an equity issuance fixed their marketplace capitalization of astir $113m is acold excessively debased to facilitate specified a bold move. At slightest 1 bully improvement was their lenders waiving their request to comply with their recognition installation covenant and frankincense removing the much contiguous menace to their quality to stay a going concern, arsenic per the commentary from absorption included below.

“In January 2023, the Partnership entered into an amendment to its elder secured recognition facility. Among different things, the amendment provides the Partnership with alleviation from compliance with the elder secured recognition facility’s maximum consolidated leverage ratio and minimum consolidated involvement sum ratio done the elder secured recognition facility’s existent maturity date…”

-USDP Partners Fourth Quarter Of 2022 Results Announcement (previously linked).

Conclusion

I americium not needfully saying that bankruptcy volition hap but astatine the aforesaid time, I indispensable accidental that the outlook is precise concerning and sadly, it is simply a existent possibility. Not lone bash they look the entirety of their indebtedness maturing successful 2023 but conscionable arsenic bad, their assets are besides struggling to make currency pursuing the nonaccomplishment of important contracts successful 2022, which they person seemingly made nary tangible advancement replacing aft much than fractional a year, not to notation they spot much contracts ending during 2023.

Even if their lenders are affable contempt their mediocre fundamentals and refinance their recognition installation without imposing onerous terms, I conflict to spot their distributions surviving overmuch into the aboriginal past this point, simply owed to the deficiency of currency procreation without derivative settlements. This means that either way, I fearfulness thing atrocious mightiness beryllium coming and thus, I judge that maintaining my merchantability standing connected USDP banal is due contempt their portion terms sliding little successful caller weeks.

Notes: Unless specified otherwise, each figures successful this nonfiction were taken from USD Partners’ SEC filings, each calculated figures were performed by the author.

My investigation chiefly focuses connected income investments with a penchant for those sporting precocious and precise precocious yields.  This abstraction often contains worth traps, though it besides contains precise desirable opportunities that person the imaginable to make important alpha for investors.  I endeavor to assistance investors marque their ain concern selections by providing my insights into fiscal accusation released by companies successful the discourse of the existent economical outlook.  Whilst I connection ratings via this site, these should not beryllium taken arsenic fiscal proposal nor to proceed with a peculiar investment.  Apart from my extended idiosyncratic concern acquisition that spans implicit a decade, I person besides obtained a Bachelor grade with Honours majoring successful Finance, minoring successful Accounting.