Things haven't been looking so good for oil and refined products pipeline and terminal operator Buckeye Partners (NYSE:BPL) in recent years. In fact, the master limited partnership (MLP) has lost more than half its value over the last five years, and is now trading in the low $30s. That's much worse than many of its peers. For example, fellow MLP Phillips 66 Partners (NYSE:PSXP) has seen its unit price -- MLP-speak for share price -- rise more than 20% over the last five years.
But Buckeye is making changes to its operations that may have a big impact on the company's future. Although the company -- and its industry -- are in a state of flux right now, Buckeye's bets could set it up to win big...or wipe out. Here's where Buckeye looks to be headed over the next five years.
For years, Buckeye had been a pretty standard bread-and-butter pipeline and terminal operator. It owned a large domestic pipeline network transporting refined products like gasoline and distillates. The system was centered around Chicago, but stretched as far as New York. Buckeye also operated terminals and some smaller pipeline systems located throughout the U.S. It also either owned outright or had a stake in several international terminals in the Caribbean, Europe, the Middle East, and Southeast Asia.
The trouble for Buckeye was that its core assets had begun to underperform. In 2017, throughputs -- the amount of product shipped through and stored in Buckeye's infrastructure -- were up, but net income was down. And even though throughputs were up, capacity utilization at its terminals had dropped from 99% in 2016 to just 92% in 2017. Meanwhile, the company's already-high debt load was increasing, and its coverage ratio for its distribution had fallen below 1, meaning it would need to make up the difference somehow.
Things came to a head in Q3 2018, when Buckeye made the strategic decision to slash its dividend. That improved the company's coverage ratio. It also decided to sell off its stake in VTTI, which jettisoned most of its overseas terminal exposure, and sold noncore terminal assets like its far-flung California terminals and small jet fuel pipelines in Florida. It's using the cash it raises to pay down debt and also to focus on its big new bet: oil from the Permian Basin in West Texas.
Joining the herd
There's no shortage of interest in the Permian Basin these days. Permian crude is comparatively cheap to drill, and there seems to be a lot of it. Drillers flocked to the Permian in 2018 to try to cash in on the lucrative combination of higher oil prices and lower production costs.
The trouble for many of those drillers is that there isn't enough infrastructure to transport that crude oil once it's been extracted from the ground. And although numerous pipeline companies are building long-haul pipelines from the Permian to the refineries and ports along the Gulf Coast, a lot of that capacity won't be coming online until late 2019 or 2020.
Once those pipelines do come online, though, there's another problem. Many Gulf Coast refineries are set up to process heavy, sour crude of the sort that comes from Canada or Venezuela. The light, sweet crude from the Permian needs to be shipped overseas. But the preferred method of shipping oil -- the Very Large Crude Carrier, or VLCC -- is a heavy craft that sits low in the water when fully loaded, and can't navigate into many of the Gulf Coast ports at Houston or Corpus Christi. Instead, VLCCs need to be fully loaded at offshore "lightering" platforms, with oil that has been transported by smaller craft.
Buckeye isn't planning to build any pipelines from the Permian, but it is partnering with Andeavor (now a part of Marathon Petroleum) and Phillips 66 Partners to construct a marine terminal in Corpus Christi that will be able to handle oil from Andeavor and Phillips 66 Partners' Grey Oak Permian Pipeline when it comes online in late 2019. More importantly, the new facility will have two berths for loading VLCCs. Buckeye is also "exploring additional connectivity" with other third-party pipeline operators, according to CEO Clark Smith on the Q3 2018 earnings call.
The road ahead
The success of Buckeye's Permian crude investments will likely determine how the company fares in five years. Specifically, Buckeye should succeed if:
- Buckeye can get its new Corpus Christi facility up and running on time,
- management can secure deals with additional third-party Permian pipeline operators to use Buckeye's new and existing Corpus Christi facilities as terminals,
- the Port of Corpus Christi moves ahead with a proposed upgrade plan to allow access to more VLCCs,
- major competitors aren't able to disrupt Buckeye's plans, and
- the Permian remains a viable and productive source for oil.
The trouble is that only the first of those is fully within Buckeye's control. No fewer than eight of Buckeye's competitors have announced plans to build new VLCC-capable marine terminals on the Gulf Coast. Enterprise Products Partners has gone a step further and is proposing an offshore terminal that would replace the lightering platform by supplying the oil through an 80-mile pipeline instead.
If third-party pipeline operators go with a different terminal operator when their long-haul pipelines are completed, Buckeye will be caught in a bind: The rail shipments of oil from the Permian that currently supply its terminals will certainly decrease as pipeline capacity ramps up. If the Port of Corpus Christi can't handle enough VLCCs, Permian producers will almost certainly ship oil elsewhere. And, according to a recent Wall Street Journal report, there are even signs that shale may not be yielding as much oil as some production companies projected.
Make or break
Buckeye's Permian strategy is make-or-break for the company. It will turn it into a Permian-exporting powerhouse...or a company with no major growth prospects. Unfortunately, it's a bit too early to tell whether it's going to make it, or be broken by it. For many investors -- particularly those who invest in an MLP because of its reliable payout structure -- that may make it too risky of an investment to consider right now, at least until a clearer picture emerges for the Permian and Gulf Coast oil shipping.
In the meantime, there are other MLPs -- or just oil and gas investments in general -- that are lower risk for better potential rewards.