Shares of oil and gas transportation and logistics company Buckeye Partners (NYSE: BPL) slid 13% in November. This continues the trend of Buckeye's price trending down in 2017. Year to date, the stock is down 29%. While there was no single day of trading that spurred the decline, it had another quarter of earnings results that weren't too inspiring.
Perhaps the best measuring stick for midstream master limited partnerships is management's ability to strike a balance between spending wisely to grow the business, paying its investors a distribution, and maintaining balance sheet integrity. One of the most effective ways to do this is to retain some operating cash flow for investment rather than pay out all available cash to shareholders. This gives the company the ability to spend on growth without remaining wholly reliant on external capital like debt or issuing shares.
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Buckeye has done one thing well over the years, and that is maintaining balance sheet integrity. Its payout to investors, however, looks a bit shaky. When Buckeye reported third-quarter earnings on Nov. 2, it noted that the company's distribution coverage ratio over the past 12 months is 0.99 times, which means it is paying out slightly more than what it brings in. This isn't the first time this has happened, either. In 2013 and 2014, the company paid out more than it brought in, while 2015 and 2016 generated just barely enough cash to cover distributions.
What is most concerning about this is that the company is about to embark on one of its most ambitious growth plans in a while to build a crude oil pipeline from the Permian Basin to Corpus Christi as well as expanding its export capacity there. If the company plans to increase its capital spending while its current cash flow doesn't cover its payout, that will lead to either lots of additional debt or dilutive share issuances.
Buckeye Partners has a lot of traits an investor would like in a master limited partnership. It has a stable revenue stream protected by fee-based contracts and has a bit of financial flexibility with its solid balance sheet. One does have to wonder, though, how long it can manage to pay out so much of its internally generated cash when there are other priorities for those funds now. If the company maintains this trajectory, then it doesn't look like that great of an investment. If it changes direction, though, it may be worth reconsidering.
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