It was abundantly clear for months that Buckeye Partners (BPL) was going to have to cut its payout. The master limited partnership's debt levels kept creeping up, it wasn't generating enough cash to cover its distribution, and management had ambitious spending plans. Something had to give, and this past quarter management decided to cut its distribution to shareholders by 40% and do a large asset sale program.
Those looked like the right moves considering the situation, but they don't look sufficient considering the company's current situation. Here's a look at the most recent quarter, what management had proposed to fix its situation, and why these current actions might not be enough to stanch the bleeding.
Image source: Getty Images.
By the numbers
| Metric | Q3 2018 | Q2 2018 | Q3 2017 |
|---|---|---|---|
| Revenue | $909.5 million | $940.8 million | $922.6 million |
| Adjusted EBITDA | $253.7 million | $254.8 million | $277.3 million |
| Net income | ($745.8 million) | $91.9 million | $116.2 million |
| Diluted EPS | ($4.86) | $0.59 | $0.81 |
| Distributable cash flow | $156.8 million | $161.9 million | $181.9 million |
DATA SOURCE: BUCKEYE PARTNERS EARNINGS RELEASE. EPS = EARNINGS PER SHARE.
This past quarter was full of changes for Buckeye, and with those changes come charges to the income statement. As part of its new divestment plan, the company took $836 million in goodwill and asset impairment charges in the quarter. Absent those charges, net income would have been $90.6 million, or $0.56 per share.
Even after adjusting for those impairments, Buckeye's results don't exactly inspire confidence. The company noted that adjusted EBITDA was down in all three of its business segments from the prior year. The decline, according to management, was largely from lower storage volumes for its marine terminals in the Caribbean.
Data source: Buckeye Partners. Chart by author.
Buckeye Partners' path was unsustainable, and Wall Street knew it. Its distribution yield was at an unsustainably high rate of 15%. The market was pricing in a payout cut and other drastic options to improve Buckeye's financial standing.
This past quarter, the company announced the conclusions of its strategic review it started at the end of the prior quarter. Based on that review, the company will sell its equity stake in recently acquired VTTI as well as sell a package of various assets. Together, the company will receive total cash proceeds of $1.43 billion that it will use to deleverage the business and cover some of its capital spending.
Also, management elected to cut its payout by 40% to $0.75 per quarter or $3.00 annually. Based on its stock price as of this writing, that would make for a distribution yield of 8.9%. Management noted that with this new payout level, its distribution coverage ratio for the quarter was 1.35.
What management had to say
In his press release statement, CEO Clark Smith discussed the results of its strategic review and how the company's recent asset sales will help to reset the company's finances and future:
I am confident that the actions taken as a result of our strategic review will not only strengthen our balance sheet and solidify our investment grade rating but also meaningfully improve distribution coverage. We are now well positioned to fund our annual growth capital spend without accessing the public equity markets. In addition, the sales of our interest in VTTI and the domestic Asset Package allow us to reallocate available growth capital to higher-return initiatives across our domestic assets, particularly the opportunities we are actively pursuing along the U.S. Gulf Coast. Our improved financial flexibility along with our remaining portfolio of pipeline and terminal assets and attractive growth opportunities are expected to provide solid long-term returns for our unitholders through all business cycles.
A good move, but perhaps not enough
Buckeye Partners made the right move by cutting its payout and focusing on developing new assets with less debt on the balance sheet and a more modest payout. Also, you have to give the company some credit for cutting ties with VTTI when Buckeye acquired a stake in it less than two years ago. Companies that make bad acquisitions tend to double down on the mistake instead of cutting ties.
While these moves were encouraging, they might not be enough to get the company back on track. Selling all of those assets means less cash coming in the door, so its seemingly healthy distribution coverage ratio might not look quite as good when it completes those asset sales. Management said on its previous quarterly statement that it wants to move toward funding more of its capital spending with internally generated cash, but that doesn't look like it will be the case based on this first payout cut.
A lot of the company's future will depend on its current slate of growth projects. If those can really move the needle in terms of cash generation, then the company could be on the right track. If these new projects underwhelm, though, it's likely we will see another payout cut.
