Thin distribution coverage and a recent decision to stop increasing distributions every quarter have investors worried that Buckeye Partners, L.P. (NYSE:BPL) can't support its hefty 11% distribution yield. Looking at current results, that's not an unreasonable concern. However, CEO Clark Smith thinks the future is still bright for this storage and pipeline focused midstream partnership with an impressive 22 year streak of annual distribution increases. Here are five important takeaways from the partnership's fourth quarter earnings call to help you better understand what's going on.
1. We are sticking with the plan
Buckeye materially diversified its business over the past seven years. Today the partnership gets 51% of EBITDA from its domestic pipelines and terminals division and 46% from its global marine terminals segment (the remainder comes from merchant services). Back in 2010, Buckeye didn't have a global marine segment, with its domestic business making up over 90% of EBITDA.
And, according to the CEO, Buckeye isn't done yet: "Our strategy remains focused on growing and diversifying Buckeye's business to capitalize on new products and services and to expand our geographic reach." This is notable because Buckeye's global diversification is unique in the midstream partnership space, setting it apart from peers. It is also a core focus that helps to guide the partnership's plans, including one of its biggest moves in 2017.
2. The VTTI acquisition is important for the future
One of the problems hampering Buckeye's units today stems from the over $1 billion purchase of a 50% interest in VTTI, a global marine terminal company, in late 2017. This is a key pillar for growth, with CFO Keith St. Clair stating during the call that, "We believe VTTI's global network of world-class terminalling assets presents us with unparalleled organic expansion and acquisition opportunities."
That, however, doesn't change the fact that the partnership's unit count increased nearly 6.5% year-over-year in the fourth quarter, largely because of the investment Buckeye made in VTTI. The new shares helped push the coverage ratio to a slim 1x for the year. That's a big concern for investors, but the investment is bearing fruit. For example, according the CFO, "The nearly 20% growth in adjusted EBITDA [in the global marine terminal division] was primarily attributable to the contribution from our investment in VTTI." In fact, the contribution from VTTI helped to offset weakness in the partnership's legacy assets.
3. Finding new customers
Although the VTTI purchase is the headline-grabbing event for Buckeye, the laggard performance of its legacy assets is something worth examining. It stems from the loss of a large customer at the partnership's Caribbean storage facilities. It was a self inflicted wound, with St. Clair noting that, "Our commercial teams continue to work on recontracting the open capacity, resulting from our decision not to renew a contract with a long-term customer at our Bahamian facility." That customer was, reportedly, Venezuela's national oil company, which has a spotty payment record.
Finding new takers for that storage hasn't been easy, with customers pulling more oil out of storage than they are putting in at the moment. However, VTTI appears to be more than offsetting the lost cash flow. The bigger takeaway here, however, is that looking at VTTI's contribution isn't enough -- you should also be watching the partnership's efforts to improve the utilization of its Caribbean assets. When this issue is eventually resolved it will allow the VTTI acquisition to shine.
4. Singles and doubles
CEO Smith also made sure to highlight during the call that small is important, too. He explained, "While our larger, long-term growth capital projects have traditionally been the focus of much of the conversation, our Domestic Pipelines & Terminals team have also executed on smaller growth initiatives, what we have referred to as singles and doubles over the past 24 months."
A good example of a "single" is the partnership's ongoing efforts to upgrade existing facilities by installing vapor recovery units (VRU). Previously, Buckeye used combustion units that would burn gasoline vapors released at its facilities. Now it captures the vapors, an environmentally friendly shift, and compresses them back into liquid product, a financially rewarding move. The VRU effort is tiny compared to VTTI, but efforts like this improve the partnership's long-term prospects. The takeaway: the little details aren't being forgotten at Buckeye.
5. The distribution
So Buckeye is continuing to run the same game plan it has been for several years. The VTTI acquisition is starting to augment cash flow in important ways. The loss of a global terminal customer remains an issue to watch, but one that appears to have more upside than downside because VTTI is making up for the loss. And the partnership is still carefully working on the smaller investments that make it a better midstream company over the long term.
But what about the distribution? According to Smith:
"With respect to our distribution policy moving forward, I would like to emphasize that Buckeye has never reduced its distribution during its 30-plus-year history as a publicly traded MLP. We have navigated challenging market conditions over that time and have operated during limited periods with a distribution coverage below 1x.
"Looking forward, during 2018, there may be periods where our distribution coverage falls below 1x. However, based on our longer-term outlook, a temporary shortfall in coverage will not affect our distribution policy."
In other words, look for distribution coverage to remain tight throughout 2018. That's likely to keep investors worried and remain a notable headwind for units. However, at this point, it doesn't appear to be a major issue for Buckeye, which has let coverage slip below 1 before as it works to expand. The current coverage weakness is just par for the course.
A huge yield opportunity
There are clearly risks at Buckeye today. The list notably includes weak distribution coverage and the loss of a notable storage customer. However, the partnership's efforts to invest for the future, including the large VTTI purchase and smaller efforts that aren't making big headlines, are starting to add to performance. Don't look for a huge coverage improvement in the year ahead, but rest assured that Buckeye's management team believes the distribution can hold as it works the same playbook that's been successfully diversifying the business for many years now. If you can handle a little uncertainty, Buckeye's 11% yield should look very enticing today.