What happened
The units of Buckeye Partners LP (BPL) declined 49% in 2018, according to data provided by S&P Global Market Intelligence. It was nothing short of a disastrous year for unitholders of this midstream energy partnership with a focus on storage assets. At this point the real damage has been done. However, investors are likely to avoid the partnership because of the decisions management made that basically destroyed the trust that had been built over years of annual distribution increases.
Check out the latest Buckeye Partners earnings call transcript.
So what
At the start of the year, Buckeye reported full-year 2017 earnings. It was a tough year, with net income per unit falling nearly 18% because of new units issued to fund the acquisition of a 50% interest in global energy storage company VTTI. Distribution coverage for the year dropped from 1.09 times in 2016 to just 1 times. The distribution was increased in 2017, but the partnership stopped making quarterly increases after a long string of such hikes. Buckeye was also having trouble finding customers for some of its storage capacity in the Caribbean. It wasn't a great way to start the year, but the acquisition was expected to help spur growth. And Buckeye had a number of construction projects in the pipeline as well.
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Unfortunately, the news went downhill from there. In a difficult capital market for midstream companies, Buckeye issued class C units in late February on which the distribution could be paid in kind via additional units rather than with cash. Every new share would make it just a little more difficult to cover the distribution. Despite the tough capital market, meanwhile, Buckeye announced plans to move forward on three projects in April. Then it announced earnings, with net income per unit falling nearly 16% in the first quarter and distribution coverage dropping to 0.91 times, with the new class C units getting paid in kind.
The news got worse in August with the release of second-quarter results. Net income per unit was down 26%, and distribution coverage was just 0.87 times. Buckeye again paid the new C units with additional shares. And management announced a strategic review, noting the importance of maintaining an investment-grade credit rating. Although the shares were already down significantly by that point, it was a big warning sign to income investors that the distribution wasn't safe.
When Buckeye reported third-quarter results in November, it announced the results of that strategic review. The list included selling its stake in VTTI, which had been acquired only a year or so earlier, disposing of other noncore assets, and cutting the distribution nearly 54% after decades of annual increases. In other words, Buckeye's management team had made a capital investment blunder, and it had cost unitholders dearly.
The truly troubling part of all of this news was that Buckeye's annual meeting, held in early June, contained a slide that prominently stated, "Given our current outlook, we have no intentions of cutting Buckeye's distribution and we continue to view a distribution cut as an option of last resort." Any trust that management had built up over the years of annual distribution increases has likely been obliterated at this point. It's not surprising that the unit price was on the decline throughout 2018 as all these troubling events unfolded.
Now what
Buckeye is in a much better financial position now that it has made the difficult decision to cut the distribution and sell its VTTI stake. There's still more work to be done, but it is setting itself up for a brighter future as its construction projects come on line in the coming years. That, however, doesn't do anything to help the income-focused unitholders who believed management's word and stuck around because of Buckeye's statements about its commitment to the distribution. This is a painful reminder that even companies with impressive dividend records can cut when the going gets tough -- regardless of supportive comments that management may have made in the past.
At this point, investors should probably take a wait-and-see attitude with Buckeye. Although it announced the sale of some noncore assets, it is still working toward the disposition of its VTTI stake, and its new capital projects still have to get funded and built. That said, anyone who considers trust a key attribute in an investment would probably be better off with a different midstream partnership.
