The recently completed third quarter was a momentous one for pipeline master limited partnership (MLP) Buckeye Partners (BPL). Not only would the company share the results of a long-awaited strategic review, but it was also expected to weigh in on whether a dividend cut was in the cards that would sharply reduce the partnership's 15% yield.
Oh, and the company would also tell us how it fared in Q3 2018. But that took a back seat to the big announcements the company made. Here's what investors need to know.
Down goes the distribution
The biggest news from the earnings call on Nov. 2 was that Buckeye has finally pulled the trigger and cut its quarterly distribution (MLP-speak for dividend) from $1.2625 per unit to just $0.75, a 40.6% cut.
This has been coming for some time now. In recent quarters, the company's distribution coverage was underwater, meaning it wasn't generating enough cash from operations to cover its dividend. And that was pushing its already-high debt levels into dangerous territory.
In spite of that, Buckeye's management had been doing everything it could to imply that the cut wasn't a done deal. In June, for example, the company pointed out in a presentation that it had never cut its distribution in its more than 30-year history, and had a record of maintaining its distribution during periods in which its coverage ratios slipped below 1.0 times. Management even flat-out stated, "[W]e have no intentions of cutting Buckeye's distribution, and we continue to view a distribution cut as an option of last resort."
But on the Q2 earnings call, the company's tune changed slightly. CEO Clark Smith reminded investors of "our goal of maintaining our level of distribution." He also admitted, however, that "given the challenges we're facing in our business and our ability to maintaining our investment grade rating, our distribution policy will be part of the strategic review." He went on to make clear that maintaining the company's investment-grade credit rating was of paramount importance to the company -- implying that given the choice between losing its rating or cutting its dividend, the company would definitely choose the latter. And choose it, management did.
Beyond the net loss
Buckeye reported a net loss of $745.8 million in Q3, which seems absolutely devastating, but there's a lot going on behind that number.
First of all, the dividend cut wasn't the only thing to come out of the strategic review that the company completed. It's also selling several assets, including its 50% stake in terminal operator VTTI for $975 million. However, that price is lower than the book value of the stake thanks to VTTI's debt load. Per GAAP rules, Buckeye had to take a noncash impairment of $300.3 million on the sale, and book it this quarter, even though the proceeds from the sale won't be booked until Q4.
Buckeye also needed to take a noncash goodwill impairment of $537 million on its underperforming Caribbean and New York Harbor terminals. Excluding those noncash items and a minor $727,000 securities loss, net income would have been $90.7 million, or $0.59 per unit. That's still a year-over-year decrease of 27.2%, but it's a far cry from a nine-figure loss.
Ultimately, though, this quarter's numbers don't look good. Pipeline transportation and terminal throughput volumes were up year over year, but revenue was down, meaning Buckeye wasn't able to convert those volumes into more cash. Worse, EBITDA -- even the adjusted figure -- was down even more sharply, meaning Buckeye's margins were suffering, and it was making less money even as it was moving more product. Not good.
There are reasons to be hopeful that Buckeye is turning the corner. Its asset sales will help the company streamline its portfolio. Gone, for example, are its two stand-alone terminals in California and its investment in far-flung places like Singapore and Buenos Aires, Argentina. Its distribution cut gives it plenty of coverage, and the cash coming in from those asset sales will help it further reduce debt and allocate capital to growth projects.
However, the company needs to show that it can make money without selling assets, and can actually grow revenue and earnings. Otherwise, this quarter's underperformance will simply happen over and over again, distribution cut or no distribution cut. For now, there are better opportunities in the MLP space.