Blueknight Energy Partners: Crude Oil Business Sale Enhances Stability Of Preferred Units
Summary
- Blueknight sold its crude oil businesses for $162 million in gross proceeds.
- This reduces its debt by over 60% while reducing its EBITDA by a bit over 20%.
- Blueknight's leverage goes from 4.0x to 2.0x.
- Series A preferred units are in a stronger position with the substantial reduction in credit facility debt ahead of it in the capital structure.
- Reduction in debt also may allow for a common unit distribution increase.
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Blueknight Energy Partners (NASDAQ:BKEPP)(NASDAQ:BKEP) has substantially reduced its debt with the sale of its crude oil businesses at a multiple that is effectively over 11x adjusted EBITDA. This reduces Blueknight's leverage from around 4.0x to around 2.0x and should allow it to continue covering its current distribution and generating a modest amount of positive cash flow after distributions from its remaining asphalt terminalling business.
Blueknight's Series A preferred units look to be in a good position now that the amount of credit facility debt ahead of the units in the capital structure has been significantly reduced. Blueknight's common units could see their distribution increased in the future as debt reduction is less of a concern now.
Crude Oil Business Sale
Blueknight recently announced the sale of its crude oil terminalling, pipeline, and trucking businesses for $162 million in gross cash proceeds. Of this, $132 million is from the sale of the crude oil terminalling segment to Enbridge and $20 million is for the sale of its crude oil pipeline business to CVR Energy.
The crude oil trucking business and the consideration for crude oil linefill and inventory make up the remaining $10 million.
At the end of October 2020, Blueknight had $255.6 million in outstanding revolver borrowings, so these transactions should reduce its debt to under $100 million.
Pro-Forma Results
Blueknight was on track to generate at least $63.6 million in adjusted EBITDA in 2020, based on its comments that it would meet or exceed guidance for the full year. The various crude oil businesses accounted for approximately $15.5 million in operating margin in 2019, while Blueknight estimated that there would be around $2 million in corporate savings after the divestitures.
This results in Blueknight's estimated adjusted EBITDA being around $50 million proforma for the sale of its crude oil businesses. This would leave its debt at approximately 2.0x adjusted EBITDA.
The sale of its crude oil businesses involved a pretty healthy multiple of over 11x adjusted EBITDA including the associated corporate costs of the divested businesses.
With $50 million in adjusted EBITDA, Blueknight will be able to generate around $40 million in distributable cash flow. This will cover its approximately $32 million in current distributions (approximately $25 million for its Series A Preferred distributions and $7 million for its common unit distributions).
| $ Million | |
| Adjusted EBITDA | $50 |
| Less: Interest | $4 |
| Less: Maintenance Capex | $6 |
| Distributable Cash Flow | $40 |
This would leave $8 million in positive cash flow after distributions, less any expansion capex (which was budgeted at around $2 million in 2020).
Valuation
I'd value Blueknight at approximately 8.5x adjusted EBITDA. This would result in a total value of $425 million for the company at $50 million in adjusted EBITDA.
Blueknight has approximately $100 million in credit facility debt proforma for the divestiture of its crude oil businesses. Blueknight's Series A preferred units have a total liquidation preference of $228 million (at $6.50 per unit). They are currently trading slightly above that at $6.82 per unit, which would imply a valuation of approximately 6.8x adjusted EBITDA before any value is attributed to the common units.
The Series A preferred units have a yield of approximately 10.5% at its current price and preferred distribution coverage of approximately 1.4x. The significant reduction in credit facility debt removes a threat to the value of the preferred units.
At 8.5x adjusted EBITDA, Blueknight's common units would be worth approximately $2.35 each. Blueknight's current $0.16 common unit distribution would only yield 6.8% at that price and 7.3% at its current unit price, but it does have some room to increase its distribution. Blueknight could double its common unit distribution and end up at roughly neutral cash flow after allowing for a minor amount of expansion capex.
Conclusion
Blueknight Energy Partners has substantially reduced its credit facility debt via the sale of its crude oil businesses. This reduces its credit facility debt by over 60% while reducing its EBITDA by a bit over 20%.
Blueknight's Series A preferred units look to be in a pretty good position after the divestiture, as there is now only $100 million in credit facility debt (around 2.0x EBITDA) ahead of the preferred units in the capital structure. Blueknight appears to be quite capable of covering the preferred unit distributions as it would take around a 30% decrease in adjusted EBITDA before coverage would become an issue for the preferred units. The relatively modest amount of remaining credit facility debt also results in the preferred units have fairly limited risk in a downside scenario.
Blueknight's common units have a lower current yield at the moment, but with its debt significantly reduced, there is the potential for the common units to see an increased distribution in the future. Blueknight could still achieve full distribution coverage while doubling its current common unit dividend, although it may want to be more conservative than that.
Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.
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