Disclosure: I am long BPL.
Buckeye Partners, L.P. (NYSE:BPL) is a publicly traded master limited partnership (NYSE:MLP) that provides oil and gas midstream logistic services. The Company possesses one of the highest quality asset bases in the MLP sector and revenues that are largely fee-based, providing consistent cash flow. Since 2009, the Company has executed a cost saving organizational restructuring, acquired its former general partner, and completed three large strategic acquisitions that have markedly improved the Partnership's growth profile. The buy-in of the GP lowered the Partnership's cost of capital and allowed BPL to more successfully bid for growth acquisition opportunities. The cost of GP buy-in and these acquisitions required issuing $2 billion in equity over the past 2 years - capital that the firm is still digesting as it continues to monetize these assets.
Major Operations. BPL's operations are conducted in three strategic business units and five reporting segments: Domestic Pipelines & Terminals, International Pipelines & Terminals, and Buckeye Services (Energy Services, Natural Gas Storage, and Development & Logistics). The Company's asset base is one of the strongest in the MLP industry with over 6,000 miles of pipeline with ~100 delivery locations and over 100 liquid petroleum product terminals. The Partnerships' assets are concentrated in the Northeast and Midwest with the exception of two marine terminals located in the Bahamas and Puerto Rico.
Recent Developments. On April 2, 2012, BPL announced the Partnership was in a rate dispute with the Federal Energy Regulatory Commission (FERC), concerning a long-standing methodology for determining tariff rates on some of its pipelines. A steady sell-off in units ensued, intensifying several weeks later when on the 1Q1012 call management also announced that distribution increases would be halted. Distribution coverage had fallen below 1.0x as recent distribution increases had outpaced growth in distributable cash flows. Added uncertainty surrounding the FERC decision prompted the Board of Directors to hold the distribution constant. From April 2 to May 18, units shed 25% of their value. While 70% of Buckeye's pipeline volume is affected by the rate dispute, the impact of FERC dispute is overblown and in the worst case scenario would be a return to FERC's market based index rates, which allow for an annual increase of PPI+2.65% going forward. This amounts to 4-5% annual tariff increases given inflation rates of ~2% that do not include the Company's growth plans, which are expected to add another ~$130 in Adjusted EBITDA over the next 3 years. All in, this positions BPL to grow EBITDA by at least an 8% CAGR through 2015. Distributable Cash Flow (DCF) is also expected to grow in the low double digits. BPL should fully cover its distribution by 2013. The Company strongly covered its distribution in 3Q12 and 4Q12 is expected to be seasonally the strongest quarter. Currently, it appears that investors have grown frustrated with the Partnership and are underestimating the incremental EBITDA add from current growth initiatives. However, as additional terminal capacity comes online from Perth Amboy and BORCO, investors should expect a gradual re-rating of the shares.
Currently, BPL's units trade at $46, within a 52 week range of $44 to $64.
Valuation Summary. The units of Buckeye Partners are currently selling at an approximate ~17% discount to an estimated $58 intrinsic value based on a discounted distributable cash flow model. Adjusted EBITDA is expected grow at 10% CAGR over the next several years, as additional capacity from the recent BORCO and Perth Amboy acquisitions comes online. Based on relative valuation, the units trade at a discount to comparable Partnership units on P/DCF and Distribution Yield and are fairly valued based on EV/EBITDA. Given the strength of the Partnership's core asset base and future growth in EBITDA and distributable cash flow coming online over the next several years from recent acquisitions, the risk-reward tradeoff for BPL is favorable.
Investment Recommendation. With a current distribution yield of 8.6%, a ~17% discount to intrinsic value, and longer-term growth prospects, BPL offers one of the most compelling values in the MLP industry and potential for a 30% return. For a set of high quality assets that produce consistent and growing cash flows (e.g. refined product pipelines and terminals), this type of value is currently rare and justifies initiating a long-term position.
Risks. Heightened leverage from recent acquisitions. Potential for dilutive equity raise. Acquisitions fail to deliver expected growth. Demand volume destruction from higher gas prices. Unfavorable FERC dispute resolution.
Disclosure: I am long BPL.