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Sprague Resources: Weather Watch

10/19/2016 8:00 am EST


Tim Plaehn

Investment Research Analyst, Investors Alley

This advisory service focuses on short-term stock ideas when I see mispricing in the market; our average holding period is less than five months and my return target is 30% to 40% on an annualized basis, explains Tim Plaehn, editor of 30 Day Dividends.

The El Niño of last winter produced significantly warmer than average temperatures for the Northeast US. The majority of weather experts are looking for a colder winter this year in the Northeast compared to last year.

The weather discussion brings us to Sprague Resources LP (SRLP), one of the largest independent wholesale suppliers of energy in the Northeast.

Sprague has focused its natural gas sales to commercial customers. As a result, the company generates most of its EBIDTA during the winter fourth and first quarters.

Sprague Resources is a cash flow machine, covering its distributions by 1.86 times over the last four quarters. In a cold winter like two years ago, the distributable cash flow from the first quarter alone covers the distributions paid to investors for the full year.

If the winter temperatures in the Northeast are average to colder than average, we should see the SRLP share value start to increase with the perceived cold weather.

My expectations are that the fourth and first quarter EBITDA numbers will be well above a year ago, driving the share value higher. Announced distribution increases will also help.

If the weather gets cold enough, I think we can have a 30% share value gain and earn some nice distributions by the time 2017 first quarter earnings are reported in early May next year.

SRLP currently yields 9.2% so we are earning a nice wage while waiting for the share price gains. We note that as an MLP, Sprague reports tax information to investors on a Schedule K-1.

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