On Friday, November 2, 2018, terminals and storage-focused master limited partnership Buckeye Partners LP (BPL) announced its third-quarter 2018 earnings results. As the market reacted to these results by driving down the unit price, it appears to have been quite disappointed by them. This was admittedly for good reason as the company missed the analyst consensus on revenues, although its earnings may not have been comparable to the year-ago quarter. In addition, as I predicted back in September, Buckeye Partners was forced to slash its distribution by 40.6%, which also likely disappointed the market somewhat.
As my long-time readers are no doubt already aware, it is my usual practice to share the highlights from a company’s earnings report before delving into an analysis of its results. This is because these highlights provide background for the remainder of the article and serve as a framework for the resultant analysis. Therefore, here are the highlights from Buckeye Partners’ third-quarter 2018 earnings results:
- Buckeye Partners reported total revenue of $909.548 million in the third quarter of 2018. This represents a 1.42% decline over the $922.619 million that the company reported in the third quarter of 2017.
- The partnership reported total operating expenses of $159.562 million in the quarter. This was slightly higher than the $157.444 million that it had in the prior year quarter.
- Buckeye Partners announced a plan to sell its entire equity interest in VTTI B.V. for $975 million and a package of non-integrated domestic pipeline and terminal assets for $450 million.
- The company reported a distributable cash flow of $156.9 million during the quarter. As Buckeye Partners had a distributable cash flow of $181.9 million in the third quarter of last year, this represents a 13.74% decline year-over-year.
- Buckeye Partners reported a net loss of $745.8 million in the third quarter of 2018. This compares quite poorly to the $116.2 million that it made in the third quarter of 2017.
These results were clearly worse all around than what the company produced in the year-ago quarter. One of the biggest disappointments that we see here is the swing of the company’s net income to a fairly large loss. One major reason for this, and the reason why I stated in the introduction that this year’s results may not be entirely comparable to last year’s, is that the company took a $537.0 million non-cash impairment charge related to its Caribbean assets. The company did not provide an in-depth rationale behind this charge other than to simply state that its recoverability declined so presumably this means that the company expects that changing market conditions have significantly reduced the amount of cash flows that will be produced by these assets in the future.
This was not the only write-down that Buckeye Partners took during the quarter. As I mentioned in the highlights, the company has decided to sell its equity interest in VTTI B.V., which is an international terminal platform. The selling price of this stake is $975 million, which is less than the value that it is listed at on the company’s balance sheet. As a result of this, the company took a $300.3 million impairment charge against this asset to recognize the loss that it expects to take when the sale is consummated in the fourth quarter of 2018.
These two impairment charges together were $837.3 million, which were more than enough to swing the company’s net profit to a loss.
In my previous report on Buckeye Partners, which is linked above, I discussed that the shift from backwardation to contango in the oil futures market has reduced demand for the storage of the commodity. This is because institutional money managers can no longer make a profit simply by purchasing physical oil and selling it in the futures market for delivery at a later date. This has reduced the demand for oil storage. The company noted this in its report, stating that “Buckeye’s third quarter results fell short of the prior year largely as a result of continued weakness in segregated storage, particularly in the Caribbean.” Although not explicitly stated, it is possible that this was a driving factor in the write-down. The company saw the revenues produced by its global marine terminals business, which is essentially the storage business outside of the United States, come in at $141.568 million compared to $155.281 million in the year-ago quarter.
The company’s domestic pipeline unit delivered much better results meanwhile, which helped to offset some of the weakness from its storage business. This was much the same as we saw at other midstream companies recently as rising production in various resource basins around the country are driving up volumes being shipped through the nation’s pipeline infrastructure as exploration & production companies need to get their newly produced resources to market. The company’s domestic pipelines and terminals business brought in revenues of $256.488 million in the third quarter of 2018, a slight increase over the $254.277 million that it brought in during the prior year quarter.
One important metric that we can use to analyze master limited partnerships like Buckeye Partners is distributable cash flow. This is a non-GAAP metric that theoretically tells us how much cash is generated by the company’s ordinary operations and remains available to be paid out to its investors. Every MLP defines distributable cash flow slightly differently. In the case of Buckeye Partners, the measurement is defined as Adjusted EBITDA less cash interest expense, cash income tax expense, and maintenance CapEx, plus or minus any realized gains or losses on any foreign currency derivatives. This is, in fact, somewhat similar to the definition used by many other MLPs. As mentioned in the highlights, the company’s distributable cash flow came in at $156.9 million in the third quarter of 2018, which compares somewhat unfavorably to the $181.9 million that the company had in the year-ago quarter.
As I mentioned in the introduction, I have been predicting that Buckeye Partners would be forced to cut its distribution due to the company having insufficient distributable cash flow to cover its distribution at the previous level and the firm’s relatively high level of debt. That prediction played out in the most recent quarter as Buckeye Partners cut its distribution by 40.6% to $0.75 per unit, down from the previous level of $1.2625 per unit. Interestingly, this had only a relatively minimal impact on the company’s unit price:
Source: Seeking Alpha
The fact that the company slashed the distribution caused the 6.7 million Class C units outstanding to convert into ordinary common units, which had a slight diluting effect on the company’s limited partners. However, the good news is that the partnership now has a distribution coverage ratio of 1.35, which is a much more sustainable level than it had before, assuming the company can maintain its cash flow at close to the current levels.
In conclusion, these results were certainly not what fans of the company wanted to see. They were, however, largely in line with what I expected. I will admit that the unit price has held up better than I feared, which is a likely sign that the distribution cut was expected and priced in. It may be worth revisiting the company now to see if an investment makes sense, which I plan to do over the next few days.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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