Buckeye: Challenges in Texas, Puerto Rico and Venezuela
10/03/2017 5:00 am EST
Many master limited partnerships (MLPs) raised on $100 oil have struggled to adapt to an environment where West Texas Intermediate fetches less than $50 per barrel, says Roger Conrad, editor of Conrad's Utility Investor.
Payout cuts at Kinder Morgan (KMI), Energy Transfer Partners LP (ETP), Plains All-American Pipeline LP (PAA) and Williams Partners LP (WPZ) severely tarnished the group’s reputation among income-seeking investors.
Recent weakness in Buckeye Partners LP (BPL) — a holding in our Conservative Income Portfolio — stems from the MLP’s thin second-quarter distribution coverage, which was largely a product of Venezuela’s national oil company abruptly ending its contracts at Buckeye’s storage terminals in the Caribbean.
But the MLP’s management team deserves credit for moving quickly to recontract this suddenly available capacity. Buckeye Partners’ assets in Corpus Christi were affected by flooding related to Hurricane Harvey, and Hurricane Irma shut down the partnership’s oil terminal in Puerto Rico.
These disruptions will weigh on Buckeye Partners’ third-quarter results. On the plus side, Buckeye Partners should also benefit from another three-month contribution from the first phase of its Michigan-Ohio pipeline expansion and its 50 percent interest in VTTI BV’s terminal business.
Although Buckeye Partners’ distribution coverage likely will remain skimpy in the third quarter, the MLP’s commitment to continuing its run of quarterly distribution increases represents a clear vote of confidence in its existing operations and $2 billion backlog of growth projects.
Meanwhile, Buckeye Partners should be able to refinance impending debt maturities at significantly lower coupon rates and doesn’t appear to be at any risk of a credit-rating downgrade.
Management also deserves plaudits for taking a proactive approach to mitigating future contract expirations by pursuing a pipeline that will transport crude oil from the Permian Basin to its terminals in Corpus Christi, Texas.
Conservatively run Buckeye Partners didn’t engage in the bad behaviors that predominated at the top of the cycle, positioning the MLP to continue chugging along and building sustainable wealth for investors in a challenging environment.
Recent weakness in Buckeye Partners LP’s unit price gives investors an opportunity to lock in a yield of more than 9 percent when they buy this solid MLP up to $70.