There are few things the stock market likes less than a dividend cut. Midstream energy company Kinder Morgan (NYSE: KMI) found this out back in 2015 when it slashed its payout by 75%; the share price still hasn't recovered.
Likewise, fellow midstream company Buckeye Partners (NYSE: BPL) was subjected to rough treatment by the market after it cut its payout by 40% in 2018. Shares of the master limited partnership (MLP) have tumbled more than 35% over the past year. But sometimes, big share price drops can create good buying opportunities for investors. Let's take a look at this beaten-down energy infrastructure company to see if it is in that position.
Oil and gas industry player Buckeye Partners has been punished by the stock market. Image source: Getty Images.
One of the biggest attractions of MLP shares are their yields. In return for preferential tax treatment, MLPs pay out almost all of their cash flow as distributions to unitholders -- for all intents and purposes, equivalent to the dividends many companies pay to stockholders. And those MLP distributions can be high: Buckeye's was nearly 15% before it slashed its dividend and even today, now that the dust has settled -- and the share price has dropped -- it sits at about 9.7%.
Buckeye had a long history of quarterly distribution increases. But in 2017, the company went into debt to finance several projects including the $1.15 billion purchase of a 50% stake in overseas terminal operator VTTI. To help pay for the acquisition, Buckeye also issued new units, which diluted net income per unit. Unfortunately, the purchase didn't work out as planned: A weak storage environment left Buckeye struggling to fill its Caribbean terminals to capacity. It stopped its quarterly distribution increases, but suggested it would at least make annual increases instead.
But then, with distribution coverage dropping below 1.0 -- meaning the partnership wasn't able to fully fund its distribution with cash from operations -- all that debt the company had taken on came back to bite it, because management was concerned about maintaining its investment-grade credit rating. On the Q3 earnings call, they bit the bullet, and announced they were cutting the dividend and selling the stake in VTTI. The share price dropped, but the company ended up in almost the same spot it had been in prior to the acquisition -- with no VTTI, lower debt, and solid distribution coverage.
Of course, this is a management team that has made some serious missteps, from the ill-fated VTTI purchase to its assurances to investors in Q2 2018 that it had no plans to cut the distribution. It's no surprise that Buckeye's return on capital employed -- a measure of management's effectiveness -- is about 1.5%, one of the lowest I could find among MLPs.
However, Kinder Morgan has begun to get back into investors' good graces by executing well in the wake of its own payout cut. If Buckeye's management can use its "hard reset" to do the same, perhaps its units could be worth considering.
On the company's most recent earnings call, CEO Clark Smith identified a handful of "higher-return growth opportunities," including a bidirectional pipeline in Ohio and Michigan that's still waiting on regulatory approval, expansions to the company's big Chicago Complex, and the South Texas Gateway marine terminal project for crude oil exports.
While some of these projects seem promising, others may run into trouble. For example, the company can't provide a timeline for when the Ohio-Michigan pipeline might come online, and the South Texas Gateway project has numerous competitors vying to store and export Permian crude via the Gulf Coast.
Show me the money
Even if everything goes Buckeye's way with these projects, the company is only planning to spend between $250 million and $300 million on growth capital expenditures in all of 2019. That's a pittance compared to many of its MLP peers:
|Company||Market Cap||Revenue (TTM)||EBITDA (TTM)||2019 Projected Growth CAPEX|
|Magellan Midstream Partners||$13.4 billion||$2.8 billion||$1.8 billion||$1.3 billion|
|NuStar LP||$2.7 billion||$2.0 billion||$627.0 million||$425 million|
|Buckeye Partners||$5.0 billion||$4.1 billion||$341.2 million|| |
$250 million to $300 million
Data source: Company earnings calls and reports. TTM = Trailing Twelve Months. CAPEX = capital expenditures. Chart by author.
Magellan Midstream Partners, for example, is planning to spend about 45.9% of its annual revenue and roughly 10% of its market cap on growth capex in 2019. The smaller NuStar is set to spend about 21.7% of its revenue and about 15.5% of its market cap. By contrast, even if Buckeye spends $300 million in 2019, that amounts to just 7.3% of its annual revenue and only around 6% of its market cap. That may not move the needle much.
Of course, as you can see in the chart above, all three MLPs are spending amounts a bit lower than their annual EBITDA. But on a percentage basis, Buckeye's $341 million trailing EBITDA is much worse than its peers', despite its higher revenue.
Buckeye Partners has not been a good investment in recent years, due to management missteps and the slashing of its payouts. Since management remains the same, Buckeye would have to be a compelling investment indeed to be considered a solid "buy."
Unfortunately, despite its high yield, it doesn't look as though Buckeye has a particularly strong plan to break out of the doldrums and get its business growing again. While the company's balance sheet is now in much better shape, there are other MLPs with similarly decent balance sheets -- and better managerial track records.
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