Is This Little Midstream the Next Big Thing?

In a world full of Kinder Morgans (NYSE: KMI  ) and TransCanadas, it is easy to forget about little midstream players like Blueknight Energy Partners (NASDAQ: BKEP  ) . But remember, Kinder Morgan started out with just one pipeline and now it is the third-largest energy company in the U.S. by enterprise value. Sometimes it pays to check out the little guys, so today I'm taking a closer look at Blueknight Energy Partners.

The Blueknight rises
In the summer of 2008, the energy trading outfit SemGroup LP had declared bankruptcy after a $2.4 billion trading loss on short crude oil futures. It had spun off its midstream MLP, SemGroup Energy Partners, sparing the MLP a similar fate, but leaving it without $100 million in annual revenues. In 2009, Vitol stepped in to pick up the pieces and the restored MLP rose from the ashes as Blueknight Energy Partners, a more conservative midstream master limited partnership.

Though it was rough going at first, by late last year, The Oklahoman was reporting on the stability of Blueknight, and its potential to grow into a prime-time midstream company. Talk is cheap, but so far Blueknight is backing it up. It completed its capital and debt restructuring by the end of 2011, and 2012 marked the first time in four years the partnership paid a distribution to unitholders.

Assets and asphalt
Blueknight's assets support three major business operations: crude oil terminals and storage, crude oil gathering and transportation, and asphalt terminals and storage. The asphalt business is actually the largest segment, though the crude oil business is growing.

Blueknight controls 1,289 miles of crude pipeline and 15 million barrels of crude oil and petroleum storage capacity, including 6.6 million barrels of storage at the oil hub in Cushing, Okla. These assets are all located in Texas and Oklahoma. It also has a fleet of more than 130 trucks which it uses for field services for oil producers.

Its asphalt assets are located in 22 states and span the continental U.S., reaching as far west as California and Washington, and as far east as New Jersey and Georgia. Blueknight controls 7.2 million barrels of asphalt and residual fuel oil storage in 44 terminals.

Future plans
Blueknight is intent on growing distributable cash flow and increasing value for unitholders, focusing on three key initiatives to achieve this goal:

  • Provide services for crude oil producers in growing oil play regions (Texas, North Dakota, Oklahoma, Rockies)
  • Capitalize on strong asphalt business by growing key customers, making acquisitions as necessary
  • Improve its trucking business

The partnership is moving forward on these goals, recently announcing its agreement with Advantage Pipeline to pick up a 30% stake in the Pecos River pipeline project. The 70-mile pipeline will connect Pecos, Texas, to a larger system at Crane, Texas, and ultimately deliver Permian crude to the Gulf Coast.

Foolish takeaway
Blueknight plans to commit about $50 million to capital projects in 2013. It's a small operation that is limited to small moves for now. If those moves remain strategic, there is no reason it will not be able to generate increasing value for unit holders.

It's easy to forget the necessity of midstream operators that seamlessly transport oil and gas throughout the United States. Kinder Morgan is one of these operators, and one that investors should commit to memory due to its sheer size – it's the third-largest energy company in the U.S. – not to mention its enormous potential for profits. In The Motley Fool's new premium research report on Kinder Morgan, our top energy analyst breaks down the company's growing opportunity, as well as the risks to watch out for, in order to uncover whether it's a buy or a sell. To determine whether this dividend giant is right for your portfolio, simply click here now to claim your copy of this invaluable investor's resource. As an added bonus, you'll receive a full year of key updates and guidance as news develops, so don't miss out!


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  • Report this Comment On February 26, 2013, at 1:39 PM, jambrosini wrote:

    I have been a holder of BKEP for over a year now and view this stock and its dividend as an essential part of my MLP strategies for future growth and diversity

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