Buckeye Partners: Distribution Cut, But Surprisingly Good Outlook – ValueWalk Premium
Buckeye Partners

Buckeye Partners: Distribution Cut, But Surprisingly Good Outlook

Buckeye Partners (BPL) is a midstream oil and gas MLP with a market cap of ~$5 billion and a past recommendation of The Sure Retirement Newsletter.

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Disclosure:  I am long BPL.

On 11/2/18, the company announced a 40.6% reduction to its distribution, falling from $1.2625 per quarter down to $0.75 per quarter.

While a distribution cut is never good news, Buckeye Partners was widely expected to reduce its distribution, and had been signalling this was a possibility for months. Here's what we wrote about Buckeye Partners the last time (September 2018) it was recommended in The Sure Retirement Newsletter:

“…Buckeye announced it will undergo a review of its business strategy and capital structure.  The company acknowledged the need for continued access to capital on its recent earnings call.  Buckeye management is sending a subtle message to investors that its distribution policy may be altered (reduced) at some point in the future.”

In fact, BPL stock actually outperformed the market (measured by the ETF SPY) on 11/2/18, falling 0.2% versus 0.6% for the market.  This is more clear evidence a distribution reduction was expected.

And, Buckeye Partners still yields 9.1% after the reduction.

But, Buckeye Partners did reduce its distribution nonetheless and broke one of our cardinal sell rules. So what should investors do?

First, analyze the company's total return prospects after the announcement.  Buckeye Partners announced two asset divestitures (at favorable prices for Buckeye Partners) that will allow the company to not issue new units over the next fiscal year.  The partnership is poised to deliver solid total returns at current prices…

You can see full analysis of Buckeye Partners in the updated Sure Analysis Research Report at the link below.

Key Metrics

Buckeye Partners

Overview & Current Events

Buckeye Partners is a master limited partnership (MLP) with a market capitalization of $5 billion that operates a diversified network of transportation and storage solutions for liquid petroleum products. The MLP generates ~2/3 of its operating income from its domestic pipelines and terminals and ~1/3 from its global marine terminals. More than 95% of its adjusted EBITDA is fee-based. Buckeye Partners was founded in 1986 and is headquartered in Houston, TX.

Buckeye Partners reported its third quarter earnings results on November 2nd. The report included a strategic review with 3 key points. First, Buckeye announced it is selling its 50% equity stake in the VTTI terminal business for $975 million. Note that Buckeye acquired 50% of VTTI for $1.15 billion on January 4th, 2017 – less than 2 years ago. The company is selling its VTTI equity stake at a loss. Second, the company announced it is selling a package of ‘non-integrated’ terminals and pipelines for $450 million. The sales of both the VTTI equity stake and the asset package are expected to close by year end. Finally, the company announced a distribution reduction from $1.2625 per quarter down to $0.75 per quarter. This pushes the company’s distribution back to 2006 levels.

The purpose of the 3 strategic moves is to allow Buckeye Partners to not sell equity to fund its growth projects in fiscal 2019, to focus the company on its highest growth areas, and to maintain an investment grade credit rating. Buckeye’s 3rd quarter results saw distributable cash flow per share decline 19.8% versus the same quarter a year ago. The company’s distributable cash flow declined primarily due to weakness in the storage portion of the business in the Caribbean.

Growth on a Per-Share Basis

Buckeye Partners

Buckeye’s cash flow per unit has fluctuated around its average of $4.79 over the last decade. The partnership has not been able to meaningfully generate growth on a per unit basis. Despite this, the company’s distribution has consistently risen – and as a result has been recently reduced. In the company’s most recent conference call, management stated they do not expect distribution growth to resume until late 2019 or 2020.

While Buckeye’s historical growth record is bleak, the company’s future looks significantly better. First, Buckeye is committed to funding growth organically next year – meaning no unit issuances and resulting dilution. The company views its units as materially undervalued (and we agree). Unit issuances now would be especially dilutive. Recent proposed asset sales and the distribution reduction will give Buckeye funds to invest in its most compelling growth projects, most of which are in Texas and the Gulf Coast region. We are estimating 4.5% growth in cash flows per unit over the next 5 years for Buckeye off of a low base for this year. Additionally, we believe distribution growth will slightly outpace cash flow per unit growth; this trend will likely occur over the back half of the next 5 years. There’s a reasonably good chance our growth estimate will increase over the next several quarters, but we are taking a ‘wait and see’ approach.

Valuation Analysis

Buckeye Partners

Buckeye Partners has traded at an average price-to-cash-flow ratio of 12.7 and an average distribution yield of 7.1% over the last decade. The company is currently trading for a 7.5 price-to-free cash flow ratio and an 8.9% distribution yield. We prefer to use cash flows to estimate fair value as average yield can be skewed by fluctuation payout ratios. We believe a fair value price-to-cash-flow multiple for Buckeye going forward is 12.0. If the partnership reverts to our estimate of fair value in 5 years, this will add 9.9% to annualized total returns.

Buckeye Partners has traded at an average price-to-cash-flow ratio of 12.7 and an average distribution yield of 7.1% over the last decade. The company is currently trading for a 7.5 price-to-free cash flow ratio and an 8.9% distribution yield. We prefer to use cash flows to estimate fair value as average yield can be skewed by fluctuation payout ratios. We believe a fair value price-to-cash-flow multiple for Buckeye going forward is 12.0. If the partnership reverts to our estimate of fair value in 5 years, this will add 9.9% to annualized total returns.

Safety, Quality, Competitive Advantage, & Recession Resiliency

Buckeye Partners

Buckeye Partners does not generate high gross profits relative to its vast asset base, but that is to be expected from MLPs. Buckeye is targeting a debt-to-EBITDA ratio of 4.5x or lower and a distribution coverage ratio of 1.2x or greater after its pending asset sales. Additionally, the partnership is committed to achieving a BBB credit rating in the future.

The fee-based model of BPL greatly reduces the sensitivity of its earnings to commodity prices. This was visible during the recent downturn in the oil market, which began in 2014. While the cash-flow-per-share of other MLPs plunged, cash-flow-per-share of Buckeye Partners has increased during that time frame. Overall, Buckeye Partners is resilient to fluctuations in commodity prices, but is affected by the volumes transferred through its pipelines and its terminals.

Final Thoughts & Recommendation

Buckeye Partners has had a rough quarter. A distribution reduction was expected, however, and the market did not react negatively to the news. Buckeye managed to get a 12x+ expected 2019 EBITDA multiple on both its proposed asset sale deals. This is a favorable price – and the company is reinvesting into organic growth deals with a cost of 5x to 8x EBITDA, an excellent deal for unit holders overall. Buckeye is a buy at current prices for risk-tolerant investors. Another distribution reduction is very unlikely, and units are significantly undervalued at current prices.

Total Return Breakdown by Year

Buckeye Partners

Income Statement Metrics

Buckeye Partners

Balance Sheet Metrics

Buckeye Partners

Profitability & Per Share Metrics

Buckeye Partners

Article by Ben Reynolds, Sure Dividend

ValueWalk readers can click here to instantly access an exclusive $100 discount on Sure Dividend’s premium online course Invest Like The Best, which contains a case-study-based investigation of how 6 of the world’s best investors beat the market over time.


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