Buckeye Partners (BPL +0.00%) is out with its third-quarter results. The midstream partnership missed earnings estimates by $0.11 per unit, however, there is a lot more to that story. Let's dig in.
The numbers that matter
Buckeye Partners reported net income of $77.3 million or $0.72 per unit. That's less than the $85.1 million or $0.87 per unit the partnership earned in the same quarter of last year. The only problem here is that earnings aren't the best number to look at when evaluating at an MLP's quarter.
Instead, investors should turn their attention to adjusted EBITDA, which is a better indication of how Buckeye and its peers performed in any given quarter. In this case, Buckeye delivered adjusted EBITDA of $153.8 million, just ahead of last year's third quarter number. However, last year's number was inflated by a one-time adjustment. Back that out and Buckeye's underlying earnings power increased by 8% over last year. So, overall it was a solid quarter.
A closer look
Buckeye Partners operates five segments with its domestic pipeline and terminal segment being the biggest contributor to income, while its international operations is its growth engine. The following chart shows how each segment performed:
| Segment | 3Q 2013 | 3Q 2012 | % Change |
|---|---|---|---|
| Pipelines and Terminals | $114,412.00 | $112,879.00 | 1.36% |
| International Operations | $40,475.00 | $33,548.00 | 20.65% |
| Natural Gas Storage | $(2,759.00) | $1,357.00 | -303.32% |
| Energy Services | $(2,220.00) | $1,619.00 | -237.12% |
| Development & Logistics | $3,934.00 | $3,168.00 | 24.18% |
| $153,842.00 | $152,571.00 | 0.83% |
Note: Dollar figures in thousands.
What's important to note here is that we see stability in its domestic segment and growth in its international segment. This is exactly what we want at Buckeye Partners.
As far as the other three minor segments go, we see a continuation of the rough year for natural gas storage, so that's no real surprise. What is a surprise is the poor showing of the energy service segment, which the company had returned to profitability in recent quarters. While it's something to watch in the future, it's not a major concern as the segment really serves the domestic pipeline business as opposed to being a real profit driver.
Distribution checkup
One number that's really critical to Buckeye investors is the cash it produces each quarter to cover its distribution. This quarter Buckeye actually came up a bit light as it was only able to cover about 84% of its distribution. That said, for the year Buckeye has exceeded the cash it needed to cover its distribution by 2%.
Having a distribution coverage ratio below 1.0 times can be a sign of danger that a distribution will need to be cut in the future. This recently happened to investors of Eagle Rock Energy Partners (NASDAQ: EROC). However, that cut was easy to spot as most of the company's revenue is exposed to commodity price fluctuations. The last few quarters, Eagle Rock Energy Partners was only able to cover about two-thirds of its distribution. Matters were made worse by the fact that Eagle Rock's debt is too high.
Buckeye investors, on the other hand, can rest easy. One of the reasons for the coverage ratio drop in the quarter was the fact that it issued a lot of shares as part of a conversion of Class B Units. Future income growth should cover this shortfall, and the company is so confident in that future that it is actually raising its distribution by 1.2% over last quarter.
A look ahead
Part of the growth that will fuel its distribution in the future is the acquisition of Hess' (HES +0.00%) East Coast terminal network. It's a deal that makes perfect sense for Buckeye. It is immediately accretive to distributable cash flow, and once under Buckeye's control, it can take full advantage of the assets. Hess used the assets to support its business, which limited its options. Buckeye will implement its commercial operating model to drive more business out of the assets than Hess ever could.
Investor takeaway
Buckeye Partners delivered a solid quarter. It continues to deliver stable growth, and it's rewarding its investors with a rock-solid payout. It's the type of portfolio anchor where the results will add up over the long-term.
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