Blueknight Energy Partners: Increased Infrastructure Spending Should Boost Its Results

Summary

• Blueknight is now a pure-play asphalt terminalling business that should benefit from increased infrastructure spending.
• Both Democratic and Republican proposals involve increased spending on roads.
• Blueknight may be able to reach $55 million in adjusted EBITDA from its current terminals.
• This would support a value of $4.20 per unit for its common units, at a 9.0x EV/EBITDA multiple.
• Blueknight's Series A preferred units are yielding 8.9% now, and that looks safe due to the stability of its business and relatively low credit facility debt.
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Blueknight Energy Partners (NASDAQ:BKEPP) (NASDAQ:BKEP) looks set to benefit from increased road infrastructure spending. This may help boost its adjusted EBITDA to around $55 million per year before the effect of any acquisitions. That level of EBITDA would support a value of approximately $4.20 per unit for its common units at a 9.0x EV/EBITDA multiple.

Blueknight's Series A preferred units are offering an 8.9% yield currently that looks quite safe due to the stability of Blueknight's asphalt terminalling business and its relatively low level of credit facility debt.

2021 Results

Blueknight delivered $67.5 million in adjusted EBITDA and $49.7 million in adjusted EBITDA from continuing operations in 2020. It expects to generate similar adjusted EBITDA from its continuing operations in 2021, with corporate synergies from its crude oil business divestiture adding around $1.5 million to $2.5 million to adjusted EBITDA over time.

Thus Blueknight may be able to deliver $51 million in adjusted EBITDA for 2021 with corporate savings at the low end of the range for 2021. Blueknight's interest expense is reduced to around $4 million now that it has a lower amount of debt. It reported having $99.9 million in debt on March 4, shortly after the closing of its crude oil business sale.

After subtracting $6 million for maintenance capex, that leaves $41 million for distributable cash flow for Blueknight in 2021, resulting in roughly 1.3x distribution coverage. This includes a $0.715 per unit per year distribution for its Series A Preferred units and the current $0.16 per unit per year distribution for its common units, adding up to $32 million in distributions per year.

	$ Million
Adjusted EBITDA	$51
Less: Interest	$4
Less: Maintenance Capex	$6
Distributable Cash Flow	$41

Click to enlarge

Source: Author's Work

Blueknight noted that its total capital expenditures (maintenance and expansion) averaged $13 million per year over the last two years, with over $6 million per year of that being for its crude oil business.

Thus if we allow $2 million for expansion capex for its asphalt business, Blueknight could generate around $7 million in positive cash flow after distributions in 2021.

Infrastructure Spending

Blueknight's longer-term outlook after 2021 looks strong with the federal government likely to significantly increase spending on highways. Both the Senate and House proposals in 2020 included major increases (28% and 42%) in proposed spending.

Source: Blueknight Energy Partners

The more recent proposals by the Biden administration and the Senate Republicans both involve significant increases in federal road spending as well, so it appears that the asphalt industry is virtually guaranteed to get a boost. It is just a matter of how much a boost they will get.

The asphalt terminalling business is pretty stable (mostly fixed fee take-or-pay contracts), so organic EBITDA growth may still be fairly modest. I can see Blueknight being able to achieve $55 million in adjusted EBITDA in 2022/2023 though with the government spending more on road infrastructure.

Source: Blueknight Energy Partners

At $55 million in adjusted EBITDA, Blueknight would be able to generate around $45 million in distributable cash flow, resulting in 1.4x distribution coverage (with its current $32 million per year distribution). Blueknight is targeting 1.3x distribution coverage overall, so with $55 million in adjusted EBITDA it could increase its common unit distribution to $0.24 per unit per year and still achieve its targeted distribution coverage. If Blueknight aims for 1.2x distribution coverage instead, it could boost its common unit distribution to around $0.30 per unit per year.

Valuation

I've been valuing Blueknight at 8.5x adjusted EBITDA. This would result in a value of approximately $3.50 for Blueknight's common units with $55 million in adjusted EBITDA. This assumes $93 million in debt at the end of 2021 and accounts for the $228 million total liquidation preference of Blueknight's Series A preferred units. Blueknight may also be able to boost its value further by making opportunistic acquisitions.

The value of Blueknight's common units is quite sensitive to its multiple though. A 9.0x adjusted EBITDA multiple would increase the value of the common units to around $4.20 per unit. For comparison, Blueknight made a number of asphalt terminal transactions at 9x to 10x EBITDA before, so an 8.5x multiple is on the conservative side.

Blueknight's Series A preferred units are now trading at around $7.99 per unit. This puts their yield at 8.9%, but with the stability of the asphalt terminalling business and Blueknight's relatively limited credit facility debt, the preferred distributions look quite safe. The main risk would be if Blueknight makes acquisitions that boost its debt significantly. At $55 million in adjusted EBITDA, the preferred distribution coverage would be 1.8x.

Effect Of Potential Acquisitions

If Blueknight buys back the three asphalt terminals it sold to Ergon in 2018 then its adjusted 2021 EBITDA (proforma for the acquisition) would be around $61 million, while its distributable cash flow would go to $48 million. This assumes a $90 million purchase price at a 9x EBITDA multiple and $3 million in additional interest costs.

Blueknight's year-end 2021 leverage would be approximately 2.9x in this example, while its distribution coverage increases to 1.5x based on its current distribution.

By 2022/2023 in this scenario, Blueknight's adjusted EBITDA could increase to around $65 million and its distributable cash flow could increase to $52 million.

	$ Million
Adjusted EBITDA	$65
Less: Interest	$7
Less: Maintenance Capex	$6
Distributable Cash Flow	$52

Click to enlarge

Source: Author's Work

This would allow Blueknight to potentially increase its common unit distribution to $0.36 per unit per year while also maintaining 1.3x distribution coverage.

Conclusion

Blueknight appears to be in a good position with the potential for increasing investment in roads boosting its outlook over the next few years. A modest improvement to $55 million in adjusted EBITDA would support a value of approximately $4.20 for its common units, assuming a 9.0x EV/EBITDA multiple. Blueknight previously made asphalt terminal dispositions and acquisitions at a 9.0x to 10.0x multiple.

Blueknight's Series A preferred units currently offer a 8.9% yield that is quite well covered. The stability of the asphalt terminalling business and Blueknight's relatively low debt make the preferred units (and its distribution) fairly safe.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in BKEP, BKEPP over 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.