A recent SEC filing to register a proposed Initial Public Offering (IPO) for their Master Limited Partnership (MLP) by terminal operator USD Group - whose principal asset is a unit train crude loading terminal in Hardisty, Alberta - reveals long-term commitments to rail by Canadian shippers. That development reflects frustration with continued delays to the expansion of congested pipeline capacity out of Western Canada but also indicates a new maturity in crude-by-rail transport. Today we discuss crude-by-rail’s coming of age in Canada.
The MLP Story
Before we start – a quick disclaimer. RBN Energy does not advocate investment in IPOs, or any security, for that matter. We are not an investment advisor. The purpose of this article is not investment advice or an endorsement.
There are now over 100 MLP’s operating in the energy sector. These partnerships invest in energy related infrastructure using a tax efficient structure and cash distributions to attract investors (see Masters of the Midstream). The MLP structure has become increasingly popular in the US in the past three years as the dramatic increase in domestic oil, gas liquids and natural gas production has required re-plumbing of the distribution and processing network – leading to significant infrastructure investment. MLP investors are attracted by regular cash distributions in an era when interest rates on competing fixed income investments have been very low. Most MLP’s are diversified midstream companies (think Enterprise, Energy Transfer, Plains etc) and gathering, processing or product terminal service companies that derive the majority of their income from hydrocarbon throughput fees. But as the MLP craze has caught fire a number have branched out into more diverse activities such as refining, petrochemicals and exploration and production (see MLP’s Exit the Toll Road). In the past month one of the biggest players, Kinder Morgan Energy Partners, bought out its MLP investors and reverted to a traditional “C Corp” structure. That has caused some to question the long-term future of energy MLP’s.
The most recent entrant into the MLP marketplace is a company called USD Partners LP (USDP). On August 29, 2014 Houston based USD Partners (formerly US Development Group) filed an SE-1 registration statement and preliminary prospectus for an Initial Public Offering (IPO) with the Securities and Exchange Commission (SEC). The IPO seeks to raise $150 Million selling investors units in USDP. The partnership’s primary objective is to acquire, develop and operate energy-related rail terminals and other midstream infrastructure assets. Judging by their prospectus, USDP will be heavily reliant on the growing crude-by-rail transport business between Western Canada and the US Gulf Coast.
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Canadian Crude by Rail
We covered the options and economics of moving Canadian bitumen crude by rail fairly extensively in the “Go Your Own Way” blog series posted a year ago, that was followed up by our Drill Down Report “Go Your Own Way – The Road To Market for Canadian Bitumen Crude” (available exclusively to RBN Backstage Pass subscribers). You can look back at these posts and the Drill Down Report for more detail but what follows is a summary of Canadian crude-by-rail rationale.