Summary
JPEP is a growth-oriented limited partnership formed in May 2010 by members of management and further capitalized in June 2011 by ArcLight to own, operate, develop and acquire a diversified portfolio of midstream energy assets.
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Based in Irving, Texas, JP Energy Partners LP (JPEP) scheduled a $276 million IPO at a price range midpoint of $20 on the NYSE with a market capitalization of $728 million for Thursday, October 2, 2014. SEC Documents
Manager, Joint-managers: Barclays; BofA Merrill; RBC; Deutsche Bank Securities
Co-managers: BMO Capital Markets; Baird; Simmons & Company; Stephens; Janney Montgomery Scott
End of lockup (180 days): Tuesday, March 31, 2015
End of 40-day quiet period: Result: Tuesday, November 11, 2014
Overview
Since formation and the formation of JPEP's affiliate, JP Energy Development LP ("JP Development"), in July 2012, the management team has successfully established a strategic midstream platform through JPEP and JP Development by way of 25 third-party acquisitions and numerous organic capital projects.
Valuation
Glossary
Conclusion: Neutral plus
LLP yields 6.5% at midpoint
Growth from dropdown asset acquisitions
To put the conclusions and observations in context, the following is reorganized, edited and summarized from the full S-1 referenced above.
Business
JPEP is a growth-oriented limited partnership formed in May 2010 by members of management and further capitalized in June 2011 by ArcLight to own, operate, develop and acquire a diversified portfolio of midstream energy assets.
Operations currently consist of four business segments: (i) crude oil pipelines and storage, (ii) crude oil supply and logistics, (iii) refined products terminals and storage and (iv) NGL distribution and sales. Together our businesses provide midstream infrastructure solutions for the growing supply of crude oil, refined products and NGLs in the United States.
Since formation, the primary business strategy has been to focus on:
• owning, operating and developing midstream assets serving areas experiencing dramatic increases in drilling activity and production growth, as well as serving key crude oil, refined product and NGL distribution hubs;
• providing midstream infrastructure solutions to users of liquid petroleum products in order to capitalize on changing product flows between producing and consuming markets resulting from the significant growth in hydrocarbon production across the United States; and
• operating one of the largest portable propane cylinder exchange businesses in the United States and capitalizing on the increase in demand and extended applications for portable propane cylinders.
JPEP intends to continue to expand the business by acquiring and constructing additional midstream infrastructure assets and by increasing the utilization of existing assets to gather, transport, store and distribute crude oil, refined products and NGLs.
JPEP's crude oil businesses are situated in high-growth areas, including the Permian Basin, Mid-Continent and Eagle Ford shale, and provide a footprint to increase volumes as these areas experience further drilling and production growth.
In addition, JPEP believes it has a competitive advantage with regard to the sourcing of opportunities to build, own and operate additional crude oil pipelines due to the insights in the market that JPEP obtains while providing services to customers in our crude oil supply and logistics segment.
JPEP believes that its NGL distribution and sales segment will continue to grow due to recent expansion into new geographic markets, an increased market presence in existing areas of operation and the increase in industrial and commercial applications for NGLs such as in oilfield and agricultural services.
JP Development Acquisition and Recast of Historical Financial Statements
Since formation and the formation of JPEP's affiliate, JP Energy Development LP ("JP Development"), in July 2012, the management team has successfully established a strategic midstream platform through JPEP and JP Development by way of 25 third-party acquisitions and numerous organic capital projects.
Dropdown asset acquisition
On February 12, 2014, JPEP acquired from JP Development an intrastate crude oil pipeline system as well as a portfolio of crude oil logistics and NGL transportation and distribution assets (collectively, the "Dropdown Assets") for approximately $319.1 million, inclusive of a working capital adjustment (the "JP Development Dropdown").
The consideration consisted of 12,561,934 of Class A common units and $52.0 million in cash. The cash portion of the acquisition was funded from borrowings under a credit agreement with Bank of America, N.A. as administrative agent. The acquisition expanded JPEP's presence in the Permian Basin, one of the most prolific, high-growth, oil and liquids-rich basins in the United States
Expected growth from acquisitions
JPEP intends to grow its business in part by seeking strategic acquisition opportunities.
Has a right of first offer to acquire certain ArcLight assets and all of JP Development's existing and future assets.
Customer concentration
JPEP relies on a limited number of customers for a substantial portion of revenues.
Glencore Ltd. and Chesapeake Energy Marketing, Inc. each accounted for more than 10% of total revenue for the year ended December 31, 2013, at approximately 50% and 13%, respectively.
Parnon Energy, Inc. and Glencore, Ltd. each accounted for more than 10% of total revenue for the year ended December 31, 2012, at approximately 30% and 17%, respectively.
Glencore, Ltd., Chesapeake Energy Marketing, Inc. and Phillips 66 each accounted for more than 10% of our total revenue for the six months ended June 30, 2014, at approximately 37%, 15% and 12%, respectively.
Glencore, Ltd. accounted for more than 10% of total revenue for the six months ended June 30, 2013, at approximately 50%.
Does not operate the crude oil storage facility
TEPPCO Partners L.P., a wholly owned subsidiary of Enterprise Products Partners L.P., serves as the operator of JPEP's crude oil storage facility.
Under the operating agreement governing TEPPCO's operation of JPEP's facility, JPEP is liable for any losses or claims arising from damage to property or personal injury claims of personnel that may result from the actions of the operator, even if such losses or claims result from the operator's gross negligence or willful misconduct.
If disputes arise over operation of the crude oil storage facility, or if JPEP's operator fails to provide the services contracted under the agreement, JPEP's business, results of operation, financial condition and ability to make cash distributions to unitholders could be adversely affected.
Competition
Crude oil pipelines and storage.
Competitors in the crude oil storage segment include Plains All American Pipeline, L.P., Occidental Petroleum Corporation, SemGroup Corporation, Rose Rock Midstream, L.P., Blueknight Energy Partners, L.P. and Enterprise Products Partners L.P.
Crude oil supply and logistics.
Competitors in this segment include Plains All American Pipeline LP (NYSE:PAA), Rose Rock Midstream, L.P., Blueknight Energy Partners LP LLC (NASDAQ:BKEP), Semgroup Corporation (NYSE:SEMG), Sunoco Logistics Partners LP (NYSE:SXL), Enterprise Products Partners LP (NYSE:EPD), Genesis Energy, L.P. and NGL Energy Partners L.P.
Refined products terminals and storage
JPEP's refined products terminals located in North Little Rock, Arkansas and Caddo Mills, Texas compete with other independent terminals on price, versatility and services provided. The competition primarily comes from integrated petroleum companies, refining and marketing companies, independent terminal companies and distribution companies with marketing and trading activities.
In the North Little Rock, Arkansas market, competitors include Magellan Midstream Partners LP and HWRT Oil Company, LLC. In Dallas, Texas, the market served by the Caddo Mills, Texas terminal, these competitors include Valero Energy Corporation, Delek Logistics Partners, LP, Magellan Midstream Partners LP and Flint Hills Resources LP.
NGL distribution and sales
In addition to competing with suppliers of other energy sources such as natural gas, our NGL distribution and sales segment competes with other retail propane distributors. The retail propane industry is highly fragmented and competition generally occurs on a local basis with other large full-service multi-state propane marketers, thousands of smaller local independent marketers and farm cooperatives.
The large, full-service multi-state marketers we compete with include Ferrellgas, L.P. and AmeriGas Partners, L.P.
Each of the customer service centers operates in its own competitive environment because retail marketers tend to be located in close proximity to customers in order to lower the cost of providing service.
The typical customer service center has an effective marketing radius of approximately 50 miles, although in certain areas the marketing radius may be extended by one or more satellite offices. Most of JPEP's customer service centers compete with five or more marketers or distributors.
5% shareholders pre-IPO
Following this offering, CB Capital Holdings II, LLC and JP Energy GP LLC (two entities that are owned and controlled by certain members of management) and Lonestar will own and control JPEP's general partner and its non-economic general partner interest in JPEP.
In addition, management will own an aggregate 5.0% limited partner interest in JPEP and Lonestar will own a 51.2% limited partner interest.
Although the general partner has a duty to manage JPEP in a manner that it believes is in the best interests of the partnership and unitholders, the directors and officers of our general partner also have a duty to manage JPEP general partner in a manner that is in the best interests of its owners.
Conflicts of interest may arise between CB Capital Holdings II, LLC, JP Energy GP LLC, Lonestar, JP Development and ArcLight and their affiliates, including JPEP's general partner, on the one hand, and JPEP and its unitholders, on the other hand.
In resolving these conflicts, JPEP's general partner may favor its own interests and the interests of its affiliates, including Lonestar, JP Development and ArcLight, over the interests of JPEP's unitholders.
Dividends
JPEP plans a minimum quarterly distribution of $0.3250 per unit for each whole quarter, or $1.30 per unit on an annualized basis, or 6.5% at the price range mid-point.
Use of proceeds
JPEP expects to receive $257 million from its IPO, allocated as follows:
pay estimated offering expenses of approximately $2.0 million;
redeem 100% of issued and outstanding Series D preferred units for approximately $42.4 million;
repay $195.6 million of the debt outstanding under the revolving credit facility; and
replenish approximately $17.1 million of working capital.
Disclaimer: This JPEP IPO report is based on a reading and analysis of JPEP’s S-1 filing, which can be found here, and a separate, independent analysis by IPOdesktop.com. There are no unattributed direct quotes in this article.