USD Partners Stock: Grab 3 More Distribution Hikes for 2022

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introduction

After significantly reducing their distributions following the onset of the Covid-19 pandemic, the start of 2021 saw USD Partners (USDP) put their distributions back into growth mode, as my previous article discussed. Given that nearly ten months have passed since that last detailed analysis, it seems timely to provide an updated analysis covering their financial performance in 2021 and the outlook for the future, which sees investors can grab three more payout hikes for 2022, which makes for a stress-free high yield close to 9%.

Executive summary and ratings

Since many readers are likely short on time, the table below provides a very brief summary and ratings for the main criteria assessed. This Google document provides a list of all my equivalent ratings as well as more information about my rating system. The following section provides a detailed analysis for readers wishing to delve deeper into their situation.

Partner Ratings in USD

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*Instead of simply assessing distribution coverage through distributable cash flow, I prefer to use free cash flow as it provides the strictest criteria and also best captures the true impact on their financial position.

Detailed analysis

Cash flow from partners in USD

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They completed another flat year through 2021 with their operating cash flow of $47.1 million, which is a practical 2.86% year-over-year increase from their previous result of $45.8 million in 2020. Even removing the temporary working capital levy which slightly benefited their results in 2021, their underlying operating cash flow was still 44.8 million, which is essentially just $100,000 off their previous equivalent earnings of $44.7 million in 2020. When combined with their very low capital and miscellaneous cash expenses alone, their cash flow free cash ended 2021 at $42.3m and was therefore sufficient to provide a very strong 317.74% coverage to their distribution payments of $13.3m, which looks set to continue throughout throughout 2022 given their positive language, per the management commentary included below.

“…given the inventory levels I have just described, our producers, our potential customers in Canada are experiencing some of the best net returns they have ever experienced.”

“Therefore, in 2022, we expect that we will see additional growth in production or supply compared to 2021.”

“So obviously we’re very encouraged by 2022 and what’s happening. We’re still taking a more conservative view in terms of distribution policy, but we’re very encouraged by that. Our coverage is good and we want to try and continue to review that distribution policy and continue to grow as much as possible.”

– Q4 2021 USD Partner Conference Call.

Even though their leadership doesn’t actually provide any specific direction for 2022 or earlier years, their comment apparently implies that 2022 should be a positive, albeit fairly uneventful, year. Although they mention the revision of their distribution policy, so far they nevertheless seem to remain in line with their current low growth rate, according to the management commentary included below.

“As a result, management intends to recommend to the board of directors of its general partner that it maintain its current distribution growth trajectory of increasing its quarterly cash distribution per unit by an additional quarter cent per quarter to the first, second, third and fourth quarters in 2022.

– Q4 2021 USD Partner Conference Call (previously linked).

Even though their abundant free cash flow could easily see their distributions doubled overnight, it looks like management is maintaining their conservative slow pace of growth, but thankfully it adds up throughout the year, despite their forecasts. quarter-cent increases don’t sound too impressive on the surface. Since their first quarterly distribution increase for 2022 was $0.121 per unit, their three remaining quarterly distributions are expected to be $0.1235, $0.126 and $0.1285 per unit for a total of $0.499 per unit in 2022 Compared to their current unit price of just $5.69, this sees a high distribution yield of nearly 9% stress-free given its large free cash flow.

USD Partners Capital Structure

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With their continued strong free cash flow throughout 2021 and relatively low distributions, it was no surprise to see their net debt continue to decline to end the year at $155.1 million, which represents a solid decline of 15.94% year-over-year from its previous level of $184.5 million at the end of 2020. Given their forecast of continued slow distribution growth in 2022, their net debt should experience another comparable decrease by the end of the year, thus reducing their indebtedness.

Partner leverage ratios in USD

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Following their lower net debt, it was not surprising to see their debt also decline alongside their respective net debt to EBITDA and net debt to operating cash flow of 3.31 and 3.29, both now below 3.51 and therefore only in the moderate territory. This marks a solid improvement from the end of 2020 where their respective results were 3.89 and 4.03, thus clearly in the high territory between 3.51 and 5.00. Meanwhile, their interest coverage has also improved to 3.82 from its previous result of 2.90 at the end of 2020. Given that all of these leverage ratios are expected to see comparably sized improvements in 2022 as their net debt trend declines, this further improves the outlook for management to increase their rate of distribution growth in 2023.

Partner liquidity ratios in USD

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Even though their respective current and cash ratios have declined to 0.96 and 0.39 from their previous respective results of 1.15 and 0.59 at the end of 2020, fortunately their liquidity remains strong. More importantly, they refinanced their current 2021 credit facility which, as a reminder, houses all of their debt, thus extending its maturity from November 2022 to one year later in November 2023. This also saw its ability to borrowing reduced to $275 million from its previous level of $385 million, leaving only $109 million remaining to be drawn, but given the outlook for their deleveraging in 2022, this should not be necessary and will continue to grow as they reduce their net debt.

Conclusion

While it would have been better to see more substantial distribution growth for 2022 given their ample free cash flow, at least their slow pace will see their financial position strengthen, reducing risk and hopefully aligning 2023 to see higher returns for unitholders. With the prospect of collecting a high stress-free payout yield of nearly 9%, their units have earned a place in my personal portfolio and as a result, I now believe it is appropriate to upgrade my rating to a buy. strong. Although I’m not necessarily advocating a set and forget attitude when it comes to investing, but in this situation, it almost seems justified given their stable financial performance and uneventful outlook, which means that unless something unexpected happens later in the year, this will be my only update for 2022.

Notes: Unless otherwise stated, all figures in this article are taken from USD Partners’ SEC Filingsall calculated figures were performed by the author.

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