This MLP's Leadership Is Key to Its Future

Investors tempted to buy this 6% yielder should know if the management team can keep that distribution flowing.

Jan 13, 2014 at 2:10PM

One company that I have my eye on as a long-term wealth builder is Buckeye Partners, L.P. (NYSE:BPL). It's an interesting company whose history dates back all the way to the days of Standard Oil. However, its future is more focused outside our borders.

One often overlooked aspect of investing is to take a closer look at those leading the company. We value leadership highly at The Motley Fool because these individuals are responsible for setting the vision of the companies we own. That's why we are looking for management teams that are aligned with investors and have made good decisions in the past. We don't want our leaders making decisions with their paycheck in mind, but instead prefer decisions based on building wealth for all stakeholders. With that in mind, let's take a closer look at the Buckeye Partners management team.

Building a well-oiled machine
In 2012, Buckeye underwent a strategic organizational realignment. Then-CEO Forrest Wylie stepped aside to become the non-executive chairman of the board in order to turn his attention to further developing Buckeye's strategic vision. Succeeding him as CEO was Clark Smith, who had been the company's chief operating officer since 2009 and a board member since 2007. He has more than 30 years' experience in the energy industry including serving in various leadership roles at El Paso, which is now part of the Kinder Morgan, Inc. family of companies.

Both men have been instrumental in the strategic transformation of Buckeye from a U.S. pipeline company to an international petroleum transportation and storage business. Since these two joined Buckeye Partners in 2007, they have led it to more than double its size by acquiring or building assets critical to the company's global growth vision. That hasn't been growth for the sake of growth either, as the company's distribution to investors has gone from $0.80 per unit in 2007 to the current rate of $1.07 per unit. Meanwhile, units are up more than 90% over the past five years. 

One of the important moves the company undertook a few years back was to buy out its general partner. This eliminated the company's incentive distribution rights and simplified the ownership structure. Because of this, Buckeye is more like Enterprise Product Partners L.P.  than Kinder Morgan and its four ways to invest in the company.

Overall, these moves have been digested and integrated into its business operations and, as I mentioned, have delivered returns for investors in the form of both distribution increases and capital gains. The company appears to be in very capable hands as it continues to invest for future growth.

Alignment with investors
Buckeye Partners compensates its management team based on a blend of short- and long-term goals. One example of this is meeting both threshold and stretch goals for distributable cash flow per unit. Buckeye compensates its management team with a base salary, but the bulk of compensation is from a very large equity component. For example, last year Smith made a base of just under $500,000, yet his overall salary was $3.4 million as he was awarded $2 million in Buckeye Partners' units in addition to other compensation. Because a good portion of the compensation of Smith and other executives in the company are in its units, this ties their wealth to that of investors.

Overall, insiders hold about 10% of the company's units, which suggests there is solid alignment with investors. While that's not as high as the 37% of Enterprise Product Partners or 35% of Kinder Morgan held by insiders, it is a lot better than many other companies these days.

The Foolish bottom line
Buckeye is a unique company in the midstream space. It has no real exposure to natural gas other than a natural gas storage business in California. Instead, this is an oil and refined products story. Even more unique to Buckeye is its international operations, which when added to its vast domestic terminal business, make this company a very interesting import/export story to watch. While insiders don't own as much of the company as some of its peers, Buckeye also has been around a lot longer. Bottom line: Investors appear to be in pretty good hands with the Buckeye leadership team.

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Fool contributor Matt DiLallo owns shares of Enterprise Products Partners. The Motley Fool recommends Enterprise Products Partners. It recommends and owns shares of Kinder Morgan. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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