Buckeye Partners: Improving Results, Worth Watching

About: Buckeye Partners, L.P. (BPL)
by: Power Hedge

Buckeye Partners showed slightly higher revenues YOY, but most other financial metrics showed declines.

The company saw strong performance out of its domestic pipeline unit, driven mostly by high demand for pipeline capacity and rising domestic production.

The global marine storage unit continued to struggle. This is the unit that forced the company to cut its distribution a few months ago.

Buckeye Partners managed to sell off a few underperforming operations, which shores up its balance sheet.

The company appears able to sustain its distribution at the current level and may be worth keeping an eye on.

On Friday, February 8, 2019, pipeline and storage-focused master limited partnership Buckeye Partners (BPL) announced its fourth-quarter 2018 earnings results. At first glance, these results were quite good, as the company completely blew away the expectations of its analysts, although the earnings number may not be directly comparable to what analysts expected. The market likewise seemed rather pleased with this performance, as the shares traded up with the announcement. A closer look at the earnings report though shows somewhat more mixed numbers, as its domestic pipeline and terminal operations performed very well, while the international unit continued to struggle.

As my long-time readers are no doubt well aware, it is my usual practice to share the highlights from a company's earnings report before delving into an analysis of its results. This is because these highlights provide a background for the remainder of the article and serve as a framework for the resultant analysis. Therefore, here are the highlights from Buckeye Partners' fourth-quarter 2018 earnings results:

  • Buckeye Partners brought in total revenues of $1.074783 billion in the fourth quarter of 2018. This represents a 13.61% increase over the $946.052 million that the company brought in during the fourth quarter of 2017.
  • The company reported an operating income of $493.652 million during the quarter. This compares very favorably to the $173.705 million that it reported in the year-ago one.
  • Buckeye Partners completed its previously announced sale of a package of domestic pipeline and terminal assets during the quarter. This resulted in a $343.0 million gain on sale.
  • It reported a distributable cash flow of $143.6 million during the fourth quarter. This represents a 23.98% decrease over the $188.9 million that it had in the prior-year quarter.
  • Buckeye Partners reported a net income of $482.520 million in the fourth quarter of 2018. This represents a significant 282.0% increase over the $126.317 million that the company had in the fourth quarter of 2017.

One thing that we inevitably notice here is that the company's revenue increased somewhat year over year, although it was admittedly nowhere near as large of an increase as many other midstream partnerships have seen. The biggest reason for the improvement here was record volumes flowing through the company's pipelines during the quarter. This is something that we are seeing all across the midstream space as the Permian basin, among other regions, struggles with a lack of pipeline capacity. This has obviously resulted in very strong demand for capacity and pipelines essentially running at full capacity. In the fourth quarter of 2018, Buckeye Partners' domestic pipeline unit transported an average of 1.519 million barrels of various liquid products, which was somewhat better than the 1.486 million barrel per day average that it had in the prior-year quarter.

Buckeye Partners also saw its average tariff (the price for moving a barrel of product across the network) increase from 90.5 to 91.3 cents year over year. This clearly shows the impact that the strong demand for pipeline capacity is having on the industry. In addition to all of this, the company saw its terminal throughput increase over the period as well, going from 1.2934 million barrels per day to 1.3531 million barrels per day.

Interestingly though, despite all of these improvements, the unit saw its adjusted EBITDA drop over the period. In the fourth quarter of 2017, the domestic pipelines and terminals segment produced an adjusted EBITDA of $159.311 million. This dropped to $148.313 million in the most recent quarter. One of the reasons for this is that Buckeye Partners had a contract to transport crude oil by rail at its Chicago Complex during the fourth quarter of last year, but this contract expired in the early part of 2018, so it was not in effect during the most recent quarter. The company also states that it had lower pipeline settlement and storage revenues, which was caused by lower petroleum product prices. Normally, these companies are somewhat insulated from commodity price fluctuations, but occasionally you do see price-linked contracts, which is clearly the case here.

The company's best-performing unit and the only one that saw its revenues grow year over year was its merchant services unit.

As we can deduce from the table above, this unit was responsible for all of the revenue growth that Buckeye Partners delivered in the year-over-year period. The company itself does not provide a reason for this increase, although it does state that the business segment saw very strong utilization across its portfolio of assets. Unfortunately though, the business suffered from weakening distillate market conditions and lower rack margins. This caused the unit's adjusted EBITDA to drop to $7.587 million from $8.853 million a year ago. We can also see that despite accounting for the largest percentage of revenues, this business unit only accounted for a minor portion of Buckeye Partners' total adjusted EBITDA of $234.725 million.

Buckeye Partners also has a global marine storage unit that primarily offers storage for crude oil in the Caribbean. This unit has been struggling for most of last year and was the primary factor that led to the partnership being forced to cut its distribution last year. We continued to see that during the most recent quarter as the unit's revenue dropped from $147.136 million to $136.106 million and adjusted EBITDA dropped from $121.737 million to $78.825 million year over year. The main reason for this is that the demand for oil storage continues to be low, mostly due to large institutional investors no longer having an interest in storing oil for investment purposes. This was a common occurrence a few years ago. The company did manage to offset this partially by acquiring the remaining 20% interest in Buckeye Texas Partners that it did not already own. The domestic storage market continues to be strong due to high levels of production in areas like the Permian basin.

In my analysis of Buckeye Partners' third-quarter results, I stated that the company is selling off its 50% equity interest in VTTI B.V. in response to the weak market environment for the global marine terminals. The company intended the sale of its stake in this entity to relieve some of the pressure that the weakness was causing on its cash flow. Buckeye Partners actually closed this deal in January, but its reported fourth-quarter results do not include any of the financial performance numbers from this entity. This is part of the agreement that the company reached in order to sell this stake. Therefore, we can conclude that the sale of this stake will not actually have an impact on the company's first quarter 2019 or later quarter's numbers, although it might have a one-time gain or loss on the sale.

As mentioned earlier in this article, Buckeye Partners saw its net income benefit from a one-time gain on sale of $343.0 million from the sale of a package of domestic pipeline and terminal assets. This gain on sale was the reason why the company's reported net income was described as not being comparable to analysts' expectations. As is the case with a realized gain in your individual portfolio, this actually does represent new money coming into the company, although there is certainly no reason to believe that the sale price here was more than what Buckeye Partners originally invested to obtain these assets. This is due to depreciation and amortization, which steadily reduces the value of all of the company's assets as listed on the balance sheet. The gain on sale means that the selling price was more than the value of the assets as listed on its books. Regardless, the fact that new money did come into the company as a result of this sale is a good thing, but it is critical to keep in mind that this was a one-time event and we will not see it repeated again in later quarters.

As is always the case, it is important for us to ensure the distribution of a company is sustainable when analyzing it. The easiest way to do this is to take a look at the firm's distributable cash flow, which is a non-GAAP measurement that theoretically tells us the amount of money generated by a company's ordinary operations that is available to be paid out to the unitholders. In the fourth quarter of 2018, Buckeye Partners reported a distributable cash flow of $143.6 million, which was down from the $188.9 million that it had in the year-ago quarter. However, the company's announced distribution of $0.75 for the quarter was also lower than what it paid out last year, and it achieved a 1.24 coverage ratio. This is a relatively solid ratio that does provide for a margin of safety.

In conclusion, this was a decent quarter for Buckeye Partners, although the company's global marine operation does continue to struggle. The firm did make some considerable progress at streamlining its operations and cleaning up its balance sheet at the same time though, and its distribution looks reasonable at the current level. Overall, things may be looking up for Buckeye Partners.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

Additional disclosure: This article was originally posted to Energy Profits in Dividends back in February along with a follow-up analysis of the company's investment prospects.