Buckeye Partners, LP's (BPL) first-quarter results were less than inspiring if you are an investor seeking high-yield stocks. That's because the energy midstream partnership's coverage ratio was a weak 0.91. Although it held the distribution steady, investors have reacted to the partnership's ongoing coverage weakness by pushing the units lower and the yield up to a huge 12%. The interesting thing is that Buckeye's management seems pretty confident that the weak coverage will be temporary. Here's what CEO Clark Smith and his team had to say about the distribution during the first-quarter conference call.
1. It could get worse
Although generally positive about Buckeye's prospects for the future, don't expect a quick upturn in the coverage ratio. Smith couldn't have been more clear:
[W]e expect our second and third quarters to be seasonally weaker quarters, consistent with historical trends, which will impact our coverage ratio.
Clearly, this isn't going to be a one-quarter thing like it was in 2017, when Buckeye's coverage dipped below 1 in the third quarter but bounced back in the fourth. The full-year coverage ratio in 2017, meanwhile, was just slightly over 1, meaning Buckeye was able to fully cover the distribution for the year. That's not going to happen this year, Smith told investors:
[W]e expect to report a distribution coverage ratio for the full year 2018 of 0.90 to 0.95 times.
2. We've been here before
Although coverage below 1 for a full year isn't comforting, Smith made sure to highlight that this isn't an unusual thing for Buckeye Partners:
As you're aware, we have operated for limited periods in the past with the distribution coverage below one times, but our distribution policy remained unchanged through those periods based on the improvement expected over the longer-term outlook.
He's specifically talking about 2013 and 2014, when coverage dipped to 0.99 times and 0.95 times, respectively. It was 1 or higher in each of the next three years as growth projects began to bear fruit. So there's some history to suggest that management takes a long-term approach.
In fact, the CEO went even further, stating:
Buckeye has continued to pay a distribution every quarter and has never reduced its distribution during its more than 30-year history as a publicly traded MLP.
3. We're working on it
Why so positive? Clark and his team see a brighter future down the line, he said:
2018 is a transitional year for Buckeye, as market conditions for segregated storage remain challenged and meaningful contributions from capital projects will not be realized until 2019 and 2020.
Here are some of the larger projects Buckeye has in the works that give it such confidence about holding the line on the distribution. It just created a partnership with Phillips 66 Partners and Andeavor (25% interest each, with Buckeye holding the remaining 50%) to build a new crude oil export terminal in Ingleside, Texas. It's backed by long-term contracts and should be up and running in 2019. The partnership is expanding its storage operation in Chicago, backed by a long-term contract from BP. This project is also expected to be completed in 2019. And Buckeye is working on a pipeline that can change flow direction that will allow it to expand its Michigan/Ohio business. That project is expected to be complete by the end of 2018.
Buckeye has smaller projects in the works, as well, but the key point is that 2018 is going to be a relatively high-cost year on the construction front. The assets being built won't start contributing to cash flow until 2019 and 2020. But as long as the company's plans play out, coverage in should start to improve in 2019. It just has to get from here to there.
4. No unit sales, plenty of liquidity
Following two unit sales, one in late 2017 and another in February, Clark explained that Buckeye has:
...eliminate[d] the need for any additional public equity offerings to fund our growth capital for 2018 and 2019.
The unit sales also reduced the partnership's leverage, which gives it more leeway to take on debt if it needs to. To that end, CFO Keith St. Clair noted:
We also have $1.4 billion of incremental liquidity available on our revolving credit facility and our total debt to trailing-12-month adjusted EBITDA was four times.
Four times is a relatively modest debt to adjusted EBITDA figure, so Buckeye isn't overleveraging itself at this point. And the unit sales and cash available from the revolver should more than cover the partnership's plan to spend around $385 million in 2018. At this point, it looks like getting through this transition year won't be an issue.
5. Asset sales could be a backstop
That said, if Buckeye were to run into trouble and needed to raise cash, it has another lever to pull: asset sales. Although the CFO made sure to point out options before assets sales when asked about the issue by an analyst, he also noted:
[W]e certainly have assets that are very, very attractive, and we believe we could monetize if we felt like that was the appropriate path.
This, it seems, would be a last resort unless a really good offer came along. But it's important to note that Buckeye's options extend beyond just selling units and adding leverage. So the backstop for covering the distribution and planned capital spending appears fairly strong at this point.
The big picture
Things don't always work out as planned, and Buckeye is clearly cutting it pretty close on the distribution right now. Although it has been down this path before and everything worked out just fine, that doesn't make it any easier for unitholders to live through the current period of weak distribution coverage. For more aggressive investors, however, Buckeye's 12% yield and the story backing that payout appear very attractive.