The past three months have all been about new beginnings for Buckeye Partners (NYSE:BPL). When it reported third-quarter earnings late last year, it announced it was cutting its payout and selling off several assets to clean up its balance sheet and fund some of its more lucrative growth projects. This past quarter, we got to see what some of those actions meant.
Here's a look at how these recent actions have changed the company's results and what it could mean for Buckeye over the longer term.
Buckeye Partners: By the numbers
|Metric||Q4 2018||Q3 2018||Q4 2017|
|Revenue||$1.07 billion||$909.5 million||$946 million|
|Adjusted EBITDA||$234.7 million||$253.7 million||$289.9 million|
|Net income||$482.5 million||($745.8 million)||$126.3 million|
|Distributable cash flow||$143.6 million||$156.8 million||$188.9 million|
Heading into this quarter, it was expected that the company's cash flow would decline from asset sales. In December, the company announced it had sold a collection of assets it deemed noncore for about $450 million. Using that cash to pay down some debt, it was able to produce about $143 million in distributable cash flow. Combined with management's decision to cut its payout by 40%, this led to a distribution coverage ratio of 1.26 times. This is a drastic improvement compared with before the payout cut. A number that high should be enough to cover some of its capital expenditures for 2019.
What management had to say
Perhaps more important than this past quarter's results were some of the things that management said on the call. According to CEO Clark Smith, the asset sales Buckeye did at the end of 2018 have significantly changed the company's finances for the better.
The significant capital proceeds generated from these two divestitures, combined with the adjustment to our distribution policy, have enabled us to address the three priorities we identified when we initiated our strategic review. First, we substantially reduced our leverage by using all of the proceeds to pay down debt. We utilized a combined $1.4 billion of proceeds to repay all borrowings on our credit facility and to retire our $250 million term loan. In addition, we've initiated the redemption of our $275 million 2019 senior debt maturity, which we expect to complete this month. As you would expect, these actions were well received by the rating agencies. All three agencies have reaffirmed Buckeye's investment-grade credit rating and moved Buckeye to a stable outlook. These actions should also eliminate our need to access the debt capital markets until our 2021 maturity.
Second, we have improved our financial flexibility by increasing our distribution coverage, allowing us to self-fund the equity portion of our growth capital spend. This has eliminated the need for Buckeye to access the public equity markets for the foreseeable future.
Not having to access the equity market is a key phrase here that investors should be thankful for. Shares are still trading at a low valuation and any new shares would mean having to dole out more cash each quarter for distributions. With enough cash on hand to invest in the business without needing to access the debt or equity markets for the next three years would be huge in reestablishing investor confidence.
The path to recovery starts with a first step
Buckeye Partners' management deserves a lot of scorn for painting the company into a financial corner and insisting on its ability to maintain its payout to investors as recently as the second quarter of 2018. It was clear that the path it was on was unsustainable and the market was telling it that by punishing its stock. Considering the financial straits it was in, a 40% distribution cut and some asset sales didn't seem like it would be enough to turn this company around.
Based on these numbers, though, it looks like a good start. Having such a high distribution coverage ratio means that investors shouldn't worry too much about another payout cut, and using that retained cash to pay for new projects will help to keep its financial house in order and maintain its investment-grade credit rating.
From here, the company's growth plans look underwhelming. The $250 million to $350 million capital spending at a time when the rest of the oil and gas logistics business is in the midst of a boom isn't going to get investors too excited. That said, a distribution yield of 9.7% that is on good financial footing can be a good income investment. All in all, it's probably best to wait a few quarters to see if the company can in fact deliver some modest growth without adding debt or issuing equity, but this is a step in the right direction.