Last year was a brutal one for investors in Buckeye Partners (BPL +0.00%). The pipeline- and terminal-operating master limited partnership (MLP) nosedived 41.5% during 2018 as investors grew increasingly concerned about the company's finances. That forced Buckeye Partners to take drastic action to improve its financial profile.
After plunging last year, Buckeye Partners could have significant bounce-back potential if it gets its finances back on solid ground and starts growing again. However, it will need to engineer a lot more than a turnaround to turn investors into millionaires.
Check out the latest Buckeye Partners earnings call transcript.
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The math to $1 million
It's mathematically possible to turn a small upfront investment into $1 million due to the wonders of compounding. For example, $1,000 invested in the S&P 500 should grow into $1 million in about 75 years, assuming the market continues to deliver an average annual return of 10% per year. Investors can speed up that path to $1 million by investing more money or choosing a higher-returning investment, as seen in the examples in the following table:
| Initial Investment | Annualized Return | Years to $1 Million |
|---|---|---|
| $10,000 | 10% | 48 |
| $1,000 | 16.6% | 45 |
| $10,000 | 16.6% | 30 |
Data source: Author's calculations.
The lost decade
Unfortunately, investors in Buckeye Partners haven't come close to even matching the market's return over the past 10 years, let alone outperforming. Overall, the company's units have managed to lose more than 10% of their value over the last decade -- though investors haven't performed that poorly since the company's high-yielding dividend over that time frame pushed its total return to more than 80%. However, that still has vastly underperformed the S&P 500, which has generated a total return of more than 285% over that time frame.
Buckeye had been outperforming the market for much of that time, but lost its footing in 2017 as concerns started growing about its finances because the company spent heavily on acquisitions and growth projects, which stretched its balance sheet too thin. The company's worst move came in early 2017, when it paid $1.15 billion to buy a 50% interest in VTTI's global marine terminal business. The MLP paid a high price for that deal, which didn't work out as planned. As a result, the company ended up selling its stake last year for $975 million, as well as another package of assets for $450 million, to improve its financial profile. In addition to that, it slashed its high-yielding dividend.
Does Buckeye now have the fuel to outperform?
The strategic moves Buckeye made toward the end of 2018 significantly strengthened its financial metrics, which should ease the market's worries about its balance sheet. Meanwhile, the dividend reduction will enable the company to retain about $300 million in annual cash flow that it can use to finance expansion projects. These moves should put Buckeye Partners in a better position to grow its earnings at a healthy pace going forward, which, when added to its still-attractive 9.5%-yielding distribution, could help it outperform the market in the future, especially if its valuation improves after last year's crash.
However, for Buckeye to turn a small investment into a $1 million payday, it would need to outperform for decades. That doesn't seem likely because the company's bread-and-butter business is moving and storing fossil fuels used mainly for transportation like gasoline, jet fuel, and diesel. While demand for transportation fuels is expected to rise 30% by 2040 according to ExxonMobil's latest long-term outlook, accelerated adoption of electric vehicles, as well as continued gains in fuel efficiency, are major headwinds. Meanwhile, growth could stall beyond 2040 as things like autonomous electric vehicles begin disrupting the transportation market and demand for fossil fuels. Because of that, it will be challenging for Buckeye to expand at a fast enough pace in the decades to come so that it can deliver millionaire-maker returns unless it pivots into a rapidly growing market such as renewables.
Lots of upside potential but not millionaire-maker material
After making several moves to shore up its balance sheet last year, Buckeye Partners could bounce back over the next few years. However, while it might deliver market-beating returns in the near term, it's highly unlikely that the company can do that for the next several decades given the anticipated gradual shift away from fossil fuels. Because of that, investors are better off looking elsewhere for a stock with millionaire-maker potential.
