Midstream limited partnership Buckeye Partners (BPL) has had a tough go of it lately, with its shares cut in half from the highs they reached in 2014 -- and that's after an over-20% gain in May. Here's a quick review of what's been going on, why Buckeye will probably be gone in a year, and what you should be doing about it now.
The rough patch
In 2018 Buckeye did something that no partnership wants to do: It cut its distribution. After a review of its operations, it came to the conclusion that it needed to change direction. That included the distribution cut and the decision to sell its 50% stake in VTTI, an energy storage provider that operates in international markets. The problem is that it had only bought that stake a few years earlier, and ended up selling VTTI for less than it paid to acquire the asset.
It has not been an auspicious time for Buckeye, a partnership which at one point had racked up more than two decades of consecutive annual distribution increases. Worse, the company was telling investors that its distribution was safe. It wasn't uncommon for the partnership to make big investments that pushed its distribution coverage below one for a bit before bearing fruit and returning coverage to more comfortable levels. But that wasn't how it went this time around -- too much debt (largely driven by the VTTI acquisition) had stretched the company's balance sheet a little too far.
Following the reset, Buckeye quickly started to show some solid progress toward a brighter future. A big piece of that was expanding its pipeline business in the U.S. market, helping to add diversification to its storage-heavy profile. The units didn't exactly turn around on a dime, but the news at least appeared to be getting better for investors. The future for Buckeye, meanwhile, is backed by a great story, since the swift growth of U.S. onshore energy production has led to material demand for additional pipeline capacity.
And then everything changed again.
Bye, bye Buckeye
On May 10 Buckeye's units rocketed higher. Driving that advance was the news that IFM Global Infrastructure Fund had offered to buy Buckeye for $41.50 per unit. That was roughly a 27% premium to where the units were trading prior to the offer. Buckeye, as you might expect, agreed to the IFM deal, with the acquisition expected to be completed in late 2019. So a year from now, Buckeye won't exist anymore.
There's a couple of takeaways here. First, the deal still has to go through all of the typical approvals. Although there's no reason to doubt that it will get approved, there's always a small chance that something could go wrong. That explains why units are trading about 2% below the offer price. Still, that's a fairly modest discount, suggesting that Wall Street is pretty confident that Buckeye will be acquired as planned by IFM.
The second big issue is more technical. IFM's acquisition offer is an all-cash deal. In other words, sticking around won't lead to an ownership stake in a new entity. So the question for investors is between holding until the end to get that extra 2%, or selling units now to lock in the current price and put the cash to some other use.
But it's not quite as easy as that. You have to take into account the distributions Buckeye will pay prior to the deal closing. Assuming it's consummated as expected, that 2% figure is more like 3.5% if one additional distribution is paid, which is highly likely. A second distribution would depend on the final timing, but would put the discount at roughly 5%. And by holding, investors would avoid having to pay commissions on a trade (likely a minor dollar amount, but still something to think about).
Take the money and run
Although missing out on between 3.5% and 5% is notable, most investors are probably better off locking in Buckeye's current price and finding a better midstream partnership to buy. The entire sector is out of favor today, so investors can pick up industry leading names like Magellan Midstream Partners or even industry bellwether Enterprise Products Partners at fairly attractive prices. By selling Buckeye you can essentially upgrade your portfolio and lock in generous yields supported by much stronger partnerships. A few percentage points of gain aren't worth the risk that something goes wrong with the acquisition offer and Buckeye ends up giving back the big unit price gains it experienced on the offer. All you'll get in that situation is shares of Buckeye itself as it continues to work its way back from a rough patch.