Recently, I participated in an investor roundtable here at the Fool and offered up one stock to buy in April. Due to space limitations I was only able to pen a few words on my pick: Buckeye Partners (NYSE: BPL ) . Because the company is not that well-known, I thought it would be helpful to flesh out my thoughts on why I think Buckeye is a compelling opportunity for income-seeking investors.
Buckeye is a master limited partnership engaged primarily in the transportation and storage of crude-oil-based products. It's history dates back all the way to the Standard Oil Company; however, it's a company that has really undergone a lot of change over the past five years. Those changes should yield significant growth, especially when it comes to the company's distribution, which I believe will begin to head higher over the next year.
Buckeye's business consists of three segments, with its domestic pipeline and storage business currently doing the bulk of the heavy lifting. That segment owns and operates 6,000 miles of pipeline, 100 liquid petroleum product terminals and around 42 million barrels of liquid petroleum product storage capacity. It also produces about three-quarters of the company's adjusted EBITDA.
The other segment of note is its international pipelines and terminal operations, which represents about a quarter of its adjusted EBITDA. This is the company's big driver of growth and its crown jewel is the BORCO marine terminal in the Bahamas. Finally, Buckeye has a small natural gas storage business as well as service and logistic operations.
As I mentioned, the crown jewel here is BORCO. Buckeye is in the midst of adding 4.7 million barrels of storage capacity to the terminal's 24.9 million barrels of capacity. However, there's enough space to double capacity if market conditions permit. As I noted to roundtable readers:
The facility has a very strategic location in the Caribbean and unlike other locations it has the advanced marine infrastructure required for deepwater access. This gives BORCO an unmatched competitive advantage in two key growth areas. First, it can serve as a bunkering area for crude oil transportation through the soon-to-be-expanded Panama Canal and second, it has the potential to be a staging area for crude oil from Latin American production that's expected to come online over the next decade.
While that international growth is nice, Buckeye does have several opportunities to grow its business here in the States. Last year, the company spent $260 million to buy the Perth Amboy Marine Terminal from Chevron (NYSE: CVX ) . The terminal is strategically located in the New York Harbor and offers a number of growth opportunities. As part of the deal, Buckeye signed a multi-year service contract with Chevron which will support it through a period of capital investments as it seeks to capitalize on the asset.
Buckeye has a history of buying under-utilized assets like Perth Amboy and operating them more profitably. In 2011 it bought $165 million in pipeline and terminal assets from BP (NYSE: BP ) . Buckeye was able to add 32 third-party customers at the terminals which led to a 34% increase year over year in the asset's adjusted EBITDA. The company sees a major opportunity to expand its terminals franchise by acquiring similar assets from major petrochemical companies and optimizing the operations for cash flow.
The Foolish bottom line
One final note, in 2010 Buckeye issued 20 million units to buyout its general partner. The midstream industry can get confusing, as investors in Kinder Morgan (NYSE: KMI ) for example, need to choose between that company's four ways to invest. Buckeye on the other hand just offers one option. Other than simplicity, this move eliminated the incentive distribution rights that has the potential to ruin your MLP investment. This gives the company a cost of capital advantage when it needs to access the market to fund its growth.
This simplified structure also provides Buckeye with more cash to fund its distribution, which is currently just under 7%. As the company executes on its growth opportunities, it will generate more cash flow which will lead it to increase that distribution. That's a recipe for future outperformance and enough for me to give Buckeye the "thumbs-up" in my CAPS profile.
One thing I will say, the incentive distribution rights and four different ways to invest doesn't mean that Kinder Morgan isn't a good investment. The company, in my opinion, is 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 premium research report on Kinder Morgan, we break 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.