USD Partners LP (USDP)
The energy sector is divided into three layers: upstream (drilling for oil and gas), downstream (refining crude into gasoline and other products), and midstream (everything in between — the pipes, tanks, and infrastructure that move and store energy commodities). USD Partners operates in the midstream, owning and operating the infrastructure that stores, gathers, and transports crude oil and other energy products.
The midstream energy business and storage
Oil and gas producers drill wells, extract crude and natural gas, and need to move it to refineries and processing plants. Pipelines carry the volume, but crude also needs to be stored at various points in the supply chain — at production sites, at distribution hubs, and at refineries. Companies that own the tanks and infrastructure that hold and move that crude provide essential services and collect fees for doing so.
USD Partners owns and operates crude-oil storage facilities, rail terminals for moving crude by rail, and logistics infrastructure that serves oil producers and refiners across North America. The company is not drilling the oil or refining it; it is providing the middleman services — safe storage and efficient movement — for a fee.
The midstream business model is attractive because it is largely insulated from commodity price swings. The price of crude oil rises and falls, but midstream operators charge fees based on volume of product moved or stored, not on the price of the product itself. A midstream operator makes the same fee to store a barrel when crude is ninety dollars as when it is fifty dollars. This decoupling from commodity prices makes midstream revenue more stable and predictable than upstream or downstream energy businesses.
The other attraction of midstream is recurring revenue. Once a crude-oil storage facility is built and connected to a production area or refinery, producers and refiners will use it regularly. The volumes may fluctuate, but the flow is persistent. This is the same logic that makes tolls on a bridge a nice business: once the bridge is built, you collect fees from everyone who crosses it, month after month, year after year.
USD Partners’ assets and operations
USD Partners operates crude-oil storage terminals, rail facilities, and logistics hubs primarily in the central United States, particularly in areas connected to major production basins and refinery complexes. The company owns and operates tanks and can store millions of barrels of crude.
The company also owns and operates rail-based transportation assets. While crude is typically moved by pipeline when possible, rail is an alternative when pipeline capacity is insufficient or unavailable, and it is economical at certain distances. Rail terminals allow producers to offload crude from trucks and load it onto trains for movement to refineries or other destinations.
These assets are capital-intensive. Building a storage facility with millions of barrels of capacity requires tens of millions or hundreds of millions of dollars in upfront investment in tanks, piping, and handling systems. Once built, the facility lasts for many years, and the capital cost is recovered over time through the fees charged to users.
How the company makes money
USD Partners’ revenue comes from charging fees for storage and transportation services. A producer might pay a per-barrel fee to store crude in a USD facility for a period of time. A shipper might pay a per-barrel fee to have crude transported via USD’s rail terminal. These fees add up: if a facility stores one million barrels daily at a fee of one dollar per barrel-day, that is one million dollars in daily revenue (before considering seasonality or utilization).
The profitability of this business depends on utilization rates. If storage facilities are full and being used by clients, fees flow and margins are healthy. If facilities are underutilized — if there is excess storage capacity and not enough crude flowing through — revenues decline and margins compress.
The business also has fixed costs: maintaining facilities, staffing terminals, complying with environmental and safety regulations, and paying debt service. These costs do not change much if utilization rises or falls. This means a small decline in volumes can meaningfully impact profitability because revenue drops while costs stay roughly the same.
The crude cycle and volumes
The amount of crude moving through midstream infrastructure fluctuates with production levels, refinery utilization, and the economics of moving crude by different methods. During periods of high oil prices, producers ramp up drilling and production, and more crude flows through midstream assets. During low-price periods, producers drill less, production declines, and volumes drop.
This creates cyclicality in midstream revenue. USD Partners’ volumes and profitability tend to track oil production in the regions where it operates. A serious decline in domestic production — due to low prices, regulatory restrictions, or other factors — would reduce the volume of crude moving through the company’s facilities and squeeze margins.
The company is also affected by the competitive dynamics of moving crude. If a new pipeline opens up, it might capture volume that previously moved via rail, reducing utilization of USD’s rail terminals. If producers decide to sell crude to different buyers, volumes at USD’s storage facilities might decline. Long-term contracts help insulate the company from short-term volume swings, but the company is not immune to shifts in where and how crude moves.
Capital structure and cash distribution
USD Partners is structured as a limited partnership, a structure common in midstream energy. Limited partners (most shareholders) receive cash distributions from the company, often on a quarterly basis. These distributions come from the cash generated by operations, after paying debt service and funding maintenance capital expenditures.
The company uses debt financing to fund much of its infrastructure investment. This is typical and, in a stable-cash-flow business like midstream, is manageable. But it means the company has fixed debt obligations that must be met regardless of utilization or market conditions. If volumes fall and cash flow declines, the company still must pay debt service, and distributions to shareholders may be cut.
Energy transition and long-term risks
The most significant long-term risk to midstream energy companies is the energy transition. If the world successfully transitions away from fossil fuels, demand for crude oil and natural gas declines, production falls, and the volume of crude moving through midstream infrastructure shrinks. This would reduce revenues and, potentially, make assets stranded.
This transition is likely to be slow — energy demand is enormous and alternatives are still ramping up — but it is real. USD Partners’ long-term profitability depends on there being sustained crude oil and natural gas production and movement for decades to come.
Nearer-term risks include regulatory changes that restrict crude-by-rail movements, environmental concerns about storage facilities in certain regions, and shifts in oil production geographies. For instance, if production shifts from the U.S. interior (where USD operates facilities) to offshore or to Canada, volume through USD’s assets might decline.
Reading USD Partners’ fundamentals
Understanding USD Partners requires studying the company’s 10-K filing (SEC CIK 0001610682), which breaks down which crude sources feed its facilities and which refineries and destinations receive the crude. This geographic mix reveals where the company is most dependent for volumes.
Key figures to track: volumes (barrels stored and transported per period), average fees per barrel, and utilization rates. Rising volumes indicate strong demand for the company’s services; declining volumes signal weakness. Operating margins show whether costs are being controlled as volumes fluctuate.
Cash flow from operations is critical for a partnership because it funds distributions to shareholders. Growing cash flow means growing distributions; shrinking cash flow means distribution cuts, which are often penalized by the market.
Debt levels and debt service coverage should be monitored. If debt service consumes too large a share of cash flow, there is little room for distributions or for funding infrastructure upgrades. Watch also for announcements of new facilities or capacity additions, which require capital investment and may take time to generate returns.
For investors, USD Partners is a cash-flowing midstream play with stable revenues in ordinary market conditions but facing long-term headwinds from energy transition. The business generates cash, but growth is limited, and long-term demand is uncertain.