USD Partners

By Malcolm Berko

October 21, 2015 5 min read

Dear Mr. Berko: Please tell me what the differences are among upstream, midstream and downstream oil and gas companies. My stockbroker suggested that I buy 500 shares of USD Partners, which he thinks is a solid speculation. What do you know about this company, and would you recommend this for a 60-year-old single lady who hopes to retire in two years? — DS, Wilmington, N.C.

Dear DS: The oil and gas industry is usually divided into the three sectors you mentioned.

The upstream sector deals with the exploration and production of oil and natural gas. This includes searching for oil and gas underground or underwater, drilling exploratory wells and operating wells that bring oil and gas to the surface. Among the most prominent upstream companies are Exxon Mobil, which produces about 5.3 million barrels of oil per day, BP, which produces 4.1 million BPD, Royal Dutch Shell, producing 3.9 million BPD, and Chevron, producing about 1.8 million BPD. And it might be interesting to know that the National Iranian Oil Co. may soon be producing 6.4 million BPD.

"Downstream" refers to the refining of oil and the processing and purifying of raw natural gas, plus the marketing and distribution of the products derived from oil and natural gas. Those products are kerosene, gasoline, jet and diesel fuels, heating oils, waxes, asphalt, lubricants, liquefied petroleum products, and hundreds of petrochemicals. Some of the most recognized downstream companies are Tesoro (TSO-$100), Magellan Midstream Partners (MMP-$67) and Marathon Oil (MRO-$18).

The midstream segment of the industry represents the activities between the production of oil and gas and the filling of the tanks of end users. Midstream companies are involved primarily in the transportation of oil and gas through railways, pipelines and waterways. Kinder Morgan (KMI-$31), a $15.5 billion-revenue company with nearly 80,000 miles of pipeline, may be the most well-known name of the group. Another that is highly regarded is Enterprise Products (EPD-$28), with 51,000 miles of pipeline.

And your USD Partners (USDP-$9.05) is a small, $42 million-revenue midstream company that operates two segments: terminal services and fleet services.

—Terminal services. USDP owns and runs the Hardisty rail terminal, an origination terminal that loads crude in Alberta and has the capacity to load two 120-car trains per day. USDP also owns two destination terminals, with a combined 33,000 BPD capacity: the San Antonio rail terminal, which deals with the transloading of ethanol, plus the West Colton rail terminal, an ethanol terminal in California.

—Fleet services. The company provides rail car services through the management of a fleet of 3,800 rail cars and is committed to customers on a long-term basis. This USDP segment provides efficient access to key markets on a fixed-cost basis and seeks to become an important part of North America's midstream infrastructure.

This teeny company, with just 10 million shares outstanding and a 6 million-share float, has a $2 book value, barely increased its most recent quarterly dividend, from 28.8 cents to 29 cents, and yields 12.5 percent. Citigroup, Barclays, Goldman Sachs, Janney Montgomery Scott, RBC Capital Markets, BMO Capital Markets, Deutsche Bank and Merrill Lynch took this little company public with the sale of 10 million shares at $17 in October 2014. I am impressed that this barely noticeable initial public offering was run by such a powerful entourage of investment banks and wonder whether there's more here than meets the eye. Then I wonder why the share price of USDP has never risen above its $17 IPO price. However, it appears that revenues will move higher in the next reporting period, that the dividend is safe and that the dividend will be increased (minutely) again this year. The distribution is not taxable; however, your cost basis is reduced each quarter by the amount of distribution that you receive.

With the exceptions of USDP's prestigious, blue-chip underwriting consortium and a high-yielding dividend that seems, for the near term, to be secure, I can't find a compelling reason to own this stock. However, I would not object, if you can afford the risk, if you decided to buy 500 shares. This may be a good speculation.

Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at [email protected] To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.

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