Examples In MLP Due Diligence - Buckeye Partners

| About: Buckeye Partners (BPL)

Summary

This is the third in a series of 'due diligence example' articles on MLPs.

BPL is a large cap investment grade MLP with better than average safety attributes.

BPL has good distribution coverage - another safety attribute.

A 6.8% yield plus 4% annual distribution growth makes BPL more of a hold than a buy.

This is the third in a series where I provide my answer the question "What is good due diligence for MLP (energy Master Limited Partnership) investors?" I will provide an example of what many retail investors would call hyper due diligence. You can opt to weed out some of the hyper to arrive at the level that feels right to you. Prune prudently. Always attempt to answer the questions all income investors ask: "is the dividend or (correctly) distribution safe?" and "can the distribution grow?"

The spreadsheet that follows summarizes key metrics in the income statement and balance sheet:

Buckeye Partners metrics: 69% refined; 18% crude; 13% other - 95% fee based

Q1-2016 Q4-2015 Q3-2015 Q2-2015 Q1-2015 Q4-2014 Q3-2014 Q2-2014 Q1-2014 Q4-2013 Q3-2013 Q2-2013 Q1-2013
Revenues 780,594 840,167 728,384 796,783 1,088,100 1,285,994 1,573,473 1,884,951 1,991,829 1,655,584 1,073,851 993,588 1,331,078
Costs 600,387 662,432 584,824 665,764 936,298 1,143,027 1,424,532 1,706,785 1,850,566 1,531,767 957,074 879,617 1,207,602
EBITDA 244,626 244,507 204,164 206,481 212,910 223,534 200,622 150,788 188,624 178,581 156,173 153,829 160,231
DCF dollars 178,870 176,198 135,598 144,896 155,748 160,109 140,450 94,423 131,795 117,818 98,625 112,113 125,594
Units 130,129 129,730 128,906 128,198 127,607 127,599 119,429 116,652 115,796 114,091 106,774 106,171 103,247
DCF/unit $1.3746 $1.3582 $1.0519 $1.1300 $1.2205 $1.2548 $1.1760 $0.8094 $1.1382 $1.0327 $0.9237 $1.0560 $1.2164
Upcoming Distrib. $1.2000 $1.1875 $1.1750 $1.1625 $1.1500 $1.1375 $1.1250 $1.1125 $1.1000 $1.0875 $1.0750 $1.0625 $1.0500
My Calculated Coverage 1.1455x 1.1437x 0.8952x 0.9721x 1.0613x 1.1031x 1.0453x 0.7195x 1.0347x 0.9496x 0.8592x 0.9938x 1.1585x
BPL's Coverage calculation 1.14x 1.14x 0.89x 0.97x 1.06x 1.10x 0.99x 0.73x 1.03x 0.94x 0.86x 1.07x 1.22x
BPL's March 2016 presentation shows 2015 LTM distribution coverage at 1.02x; 2014 at 0.96x; 2013 at 0.99x; 2012 at 1.04x; 2011 at 0.91x
Broker1 DCF/unit $1.37 $1.36 $1.05 $1.13 $1.22 $1.25 $1.18 $0.81 $1.14
Broker2 DCF/unit $1.358 $1.052 $1.130 $1.223 $1.255 $1.106 $0.812 $1.137
Broker3 DCF/unit $1.357 $1.052 $1.132 $1.224
Long Term Debt 3,701,717 3,732,824 3,623,843 3,574,555 3,489,268 3,388,986 3,663,690 3,309,293 3,234,002 3,092,711 2,676,946 2,569,630 2,455,412
LTM EBITDA 899,778 868,062 847,089 843,547 787,854 763,568 718,615 674,166 677,207 648,814 642,266 638,664 604,767
LT Debt/EBITDA 4.11x 4.30x 4.28x 4.24x 4.43x 4.44x 5.10x 4.81x 4.77x 4.77x 4.18x 4.02x 4.06x
Short Term Debt 149,600 111,488 148,450 209,300 95,800 166,000 182,000 400,000 348,000 226,000 180,000 76,000 124,900
Total Debt 3,851,317 3,844,312 3,722,293 3,783,855 3,585,068 3,554,986 3,845,690 3,709,293 3,582,002 3,318,711 2,856,946 2,645,630 2,580,312
Total Debt/EBITDA 4.28x 4.43x 4.39x 4.48x 4.55x 4.66x 5.35 5.50x 5.29x 5.11x 4.45x 4.14x 4.27x
BPL's March 2016 presentation shows the LTM 'rating agency' leverage ratio at 4.80x; 2014 at 4.80x; 2013 at 5.30x; 2012 at 5.30x; and 2011 at 5.50x.
BPL's November 2015 presentation shows the LTM leverage ratio at 3.98x; 2014 at 4.06x; 2013 at 4.20x; 2012 at 4.74x; and 2011 at 4.55x.
Interest Expense 47,783 44,233 43,413 41,976 41,709 44,172 43,838 42,012 41,213 36,093 34,341 30,237 30,249
Interest Coverage 5.12x 5.23x 4.70x 4.92x 5.10x 4.54x 4.58x 3.59x 4.58x 4.98x 4.55x 5.09x 5.30x

On 9-09-14 BPL offered $300 million 4.35% notes due 2024 + $300 million 5.60% notes due 2044
On 11-06-13 BPL offered $400 million 2.65% notes due 2018 + $400 million 5.85% notes due 2043
On 6-03-13 BPL priced $500 million of 4.15% notes that mature July 1, 2023 On 1-04-11 BPL priced $650 million 4.875% notes that mature February 1, 2021
On 09-03-14 BPL prices 6,750,000 units at $80.00 On 8-12-14 BPL prices 2,600,000 units at $76.60 On 10-10-13 BPL prices 7,500,000 units at $62.61
On 1-24-13 BPL prices 6,000,000 units at $52.54 On 04-14-11 BPL prices 4,800,000 units at $59.41
Click to enlarge

What can we learn from these numbers?
1. First off, I have verified by DCF/unit (or Distributable Cash Flow per unit) calculations with the DCF numbers from three different brokerage analysts. The BPL DCF calculation is simple - there is no adjustment to subtract DCF dollars owed to the General Partner. Most MLPs require adjustments for 'normalization' of the DCF metric for items like mark to market hedge gains and gains from one time sales of assets. I can arrive at reasonably good numbers without going to that degree of complexity.
2. I can have a high level of confidence in my DCF calculation because my numbers match those done by the professional analysts.
3. DCF/unit change since 2013 has been slightly positive. Most MLPs have faced headwinds due to commodity price falls.
Let's move on to some attributes I know due to producing similar spreadsheets for many other MLPs. As you absorb the data from future articles in this series, you will have the data in which to arrive at similar assessments.
4. DCF/unit numbers by quarter are moderately volatile.
5. The 'annual' distribution coverage is improving - going from a condition that was bad to one that is average. That is both a safety and growth attribute.
6. The debt metrics are average and improving.
7. In a low inertia environment, a good forward DCF projection will be close to the LTM (last twelve month) DCF number. For BPL, LTM DCF is (1.37 + 1.36 + 1.05 + 1.13) $4.91/unit. But BPL has some DCF inertia. With Q1-16 DCF 15 cents above Q1-16 DCF, I would expect a 2016 projection to be around 10% higher than the 2015 actual.

I have 8 2016 DCF projections from the 11 brokerages I use to create a consensus number. The projections range from $5.13 to $5.46. The average for the projections is $5.29 - and five projections are within ten cents of the average. The 'brokerage sourced' 2015 actual DCF was $4.70 while my data shown above would put the number at $4.75. A 10 percent increase in that $4.75 would put the projection at $5.23.

Why would BPL have this atypical DCF inertia?

It is my rule of thumb to put as little of my own thinking into my due diligence as possible. "Don't think - just listen to the numbers" could be my mantra. But the BPL DCF inertia requires some kind of explanation. BPL derives 70% of its cash flows from terminals (which I interpret as storage) and 30% from pipelines. In an environment where there is more supply than demand, there should be a higher demand for storage. In an environment of "contango" (where the futures price of a commodity is higher than the current spot price), there should be a higher demand for storage. It strongly appears that BPL has the right asset mix for this specific point in time.

Now that I have a good DCF - let's move on the CAGRs - or a five year forward "Compound Annual Growth Rate" projection of the distribution.

Long term metric trends
The average calculation for growth is for ten years - for 2006 through 2015
The first average is the sum of changes for each individual year over ten year period - with that result divided by 10
The 2nd average is the difference between the current and beginning number, divided by the beginning number - with that result divided by 10
The distributions shown are annualized first quarter distributions

Company 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 average average CAGRs PI-CAGRs
BPL DCF 3.19 3.27 3.50 4.05 4.13 3.63 3.76 4.17 4.38 4.70 5.29 5.47 My 4.40% RRR-yield 4.20%
growth 2.5% 7.0% 15.7% 2.0% -12.1% 3.6% 10.9% 5.0% 7.3% 12.6% 3.4% 5.79% 6.58% Last5 7.84% P/DCF Ratio 4.09%
Dist. 2.95 3.15 3.35 3.55 3.75 3.90 4.11 4.15 4.35 4.55 4.75 Broker1 2.50% Broker2 4.60%
growth 6.8% 6.3% 6.0% 5.6% 4.0% 5.4% 1.0% 4.8% 4.6% 4.4% 4.89% 6.10% Broker3 4.80% Broker4 0.00%
Dist/DCF 92% 96% 96% 88% 91% 107% 109% 100% 99% 97% 90% 97.27%
Click to enlarge

The average distribution growth has been right at 5% while the distribution/DCF ratio has been 97%. Given that the current ratio is 90%, forward distribution growth should be slightly above average growth. Last 5 year DCF (ending with the 2017 projection) has averaged (+10.9 +5.0 +7.3 +12.6 +3.4) 7.84%. I usually want my distribution growth number to be in alignment with the average DCF growth number. Because the coverage ratio has been poor, I want my CAGR to be slightly lower.
I show three CAGR projections from the major brokerages - and I want a personal projection that is in alignment with a conservative consensus. There are two PI-CAGRs or "price implied CAGRs". I want the price implied CAGRs to be high enough to show the market is (mostly) pricing in projections in the same neighborhood - while at the same time I want the price implied CAGRs to be under the fundamentally derived projection to indicate that the degree of goodness expected in EPD is not fully priced in. (Those are frequently mutually exclusive attributes.)
For BPL, I believe my CAGR projection is the right amount lower than the brokerage projections - but my CAGR projection for BPL is slightly above the price-implied CAGRs - which would indicate BPL is very close to fairly valued.

Now that I have arrived at a growth projection with which I can have a fair amount of confidence - it is time to make a numeric risk assessment.

When it comes to historical DCF projection accuracy - BPL is average. When it comes to credit ratings - it is average. When it comes to credit metrics - it is average. When it comes to distribution coverage - it is average for the sub-sector. Because of these attributes, I assess BPL with an average Required Rate of Return ("RRR" or risk assessment) in this grouping. Low RRRs are in the 10s and mainly go to BBB+ rated companies. Average RRRs for covered distributions are in the 11s and mainly go to BBB rated companies. Uncovered distributions result in RRRs in the 12s and mainly go to BBB- rated companies.

And with that - you should be sufficiently prepped for the ending spreadsheet that compared valuations:

Yield + CAGR Total Return Expectations

Company Q2-16 Consensus Total Bonds DCF My Total Rtn Consensus Price Implied CAGR Distrib Price
Yield CAGR Return Ratings Accr RRRs - RRR Ratings RRR-Yld P/DCF / DCF / DCF
Buckeye Partners, L.P. (NYSE:BPL) 6.80% 4.40% 11.20% BBB- 2.50 11.00 0.20 2.1 4.20 4.09% 89.79 13.21
Enable Midstream Partners (NYSE:ENBL) 8.93% 0.10% 9.03% BB+ 3.00 12.50 -3.47 2.6 3.57 1.84% 102.58 11.49
Enbridge Energy Partners, L.P. (NYSE:EEP) 10.53% 0.50% 11.03% BBB 2.00 12.00 -0.97 2.9 1.47 0.04% 105.52 10.02
Enterprise Products Partners L.P. (NYSE:EPD) 5.66% 5.30% 10.96% BBB+ 1.30 10.00 0.96 1.7 4.34 3.24% 77.83 13.75
Energy Transfer Partners, L.P. (NYSE:ETP) 11.19% 2.00% 13.19% BBB- 3.00 12.50 0.69 2.2 1.31 0.27% 107.93 9.64
Kinder Morgan, Inc (NYSE:KMI) 2.88% 6.00% 8.88% BBB- 1.30 11.00 -2.12 2.4 8.12 -5.40% 23.26 8.08
Magellan Midstream Partners LP (NYSE:MMP) 4.46% 8.00% 12.46% BBB+ 1.00 10.30 2.16 2.1 5.84 11.60% 80.05 17.97
Oneok Partners, L.P. (NYSE:OKS) 8.44% 0.80% 9.24% BBB 3.00 12.50 -3.26 2.9 4.06 4.41% 100.32 11.89
Plains All American Pipeline, L.P. (NYSE:PAA) 10.49% 0.10% 10.59% BBB 3.00 12.50 -1.91 2.7 2.01 3.89% 121.74 11.60
Spectra Energy Partners, LP (NYSE:SEP) 5.44% 7.00% 12.44% BBB 1.00 10.30 2.14 2.2 4.86 5.90% 81.00 14.89
Sunoco Logistics Partners L.P. (NYSE:SXL) 7.15% 9.30% 16.45% BBB 1.10 12.00 4.45 2.1 4.85 4.10% 87.32 12.21
Average 7.45% 3.95% 11.41% 2.35 4.06% 3.09% 12.25
Click to enlarge

"Total Return minus RRR" is my the buy, hold or sell number. Positive is buy - the stock is selling below what the valuation assessments suggest. Negative is sell - the stock is selling above what the valuation assessment suggest. Close to zero means the stock is correctly priced. In most sectors there is superior metric transparency compared to MLPs - and I produce TR - RRR numbers that are close to zero. Total Return or "TR" = Yield + CAGR.

What does all of this math mean?

BPL is better than the average "hold" while being weaker than the average "buy" based on current valuations. The BPL asset mix makes it a little bit different. It is good MLP to have in your portfolio for that diversification attribute. Retail investors will be well served to reach and stick with a heavy weighting in the investment grade MLPs with strong distribution coverage and superior debt metrics. BPL is right on the border line between being good and being average. That is reflected in its yield.

Disclosure: I am/we are long EPD, MMP.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.