(Published by Bob Ciura on July 7)
After a strong rally in 2016, the price of oil has declined again in 2017.
The good news is the recent downturn has created high-yield opportunities among the 100-plus publicly traded master limited partnerships.
For instance, Buckeye Partners LP (BPL, Financial) sports a 7.8% dividend yield. It is one of just 416 stocks with a 5%-plus dividend yield.
Buckeye’s very high yield is due to a 10% drop in its share price over the past year, combined with a long track record of dividend growth.
Buckeye has delivered quarterly cash distributions since it was founded in 1986. It is one of the highest-yielding Dividend Achievers, a group of stocks with at least 10 years of consecutive dividend increases.
Income investors may want to give Buckeye a closer look.
Business overview
Buckeye Partners is a midstream MLP, meaning it operates oil pipelines and storage terminals. It has three business segments:
- Domestic pipelines and terminals (53% of EBITDA).
- Global marine terminals (41% of EBITDA).
- Merchant services (6% of EBITDA).
The company’s domestic assets consist of more than 6,000 miles of pipeline and 115 terminals, which have storage capacity of 56 million barrels.
The global marine terminals segment holds seven petroleum terminals, with 62 million barrels of product storage capacity. Buckeye also owns a 50% stake in VTTI B.V., which operates 15 terminals.
Buckeye’s product breakdown is as follows:
- Refined products (68% of EBITDA).
- Crude oil/condensate (20% of EBITDA).
- Other (12% of EBITDA).
Refined products primarily include gasoline, jet fuel, diesel and heating oil. The other category includes fuel oil, butane and propylene.
Buckeye is diversified geographically, with its four most important hubs being the Chicago Hub, New York Harbor, the Gulf Coast and the Caribbean.
Source: 2017 Annual Meeting, page 9
As a midstream operator, Buckeye is much less exposed to falling oil prices than oil producers like ConocoPhillips (COP, Financial) or even Exxon Mobil (XOM, Financial).
This is because Buckeye strictly operates storage and transportation assets. These assets generate fees based on volumes stored and transported throughout the system.
As long as demand holds steady, Buckeye’s fees and cash flow are relatively stable. In the trailing 12-month period through March 31, approximately 98% of Buckeye’s adjusted EBITDA was fee-based.
2016 was a year of significant achievement for Buckeye. The company generated more than $1 billion of EBIDTA for the first time in its 130-year history.
It also announced the VTTI investment, which fits well with the company’s operating strategy. VTTI derives 100% of its revenue from fee-based assets, with no direct commodity price exposure.
In addition, VTTI is based in the Netherlands, which gives Buckeye exposure to international growth opportunities.
VTTI, along with new projects, fuels Buckeye’s future growth prospects.
Growth prospects
Buckeye has attractive growth potential moving forward. In all, Buckeye has identified more than $2 billion of pipeline growth projects, which include a mix of organic growth and acquisitions.
First, Buckeye recently completed phase one of its Michigan-Ohio expansion project. The company has secured 10-year commitments from oil customers, totaling 50,500 barrels per day.
Phase two of the project, expected to be completed by the end of 2018, is projected to add another 40,000 barrels per day of capacity.
The expansion project is attractive for Buckeye as it gives refineries in the Midwest a pipeline to move lower-cost fuels to meet rising consumer demand in the Eastern U.S.
Separately, Buckeye has another growth opportunity in the Permian Basin, one of the premier oilfields in the U.S.
Source: 2017 Annual Meeting, page 14
This project is to construct a 600-mile pipeline within Texas, and is expected to handle up to 400,000 barrels per day.
In addition, Buckeye is considering a natural gas liquids pipeline, which would further expand its Permian Basin operations.
These projects will help continue Buckeye’s growth. In the first quarter, adjusted EBITDA rose 13.5% to $277.5 million.
Buckeye’s distributable cash flow rose 6.7% year over year last quarter, but the dividend coverage deteriorated slightly.
Buckeye now has a fairly tight dividend coverage, but this is largely because the company had to issue additional units to help finance the VTTI deal.
Going forward, VTTI should prove to be an accretive investment, which is why Buckeye still expects to raise its dividend each year.
Dividend analysis
On May 5, Buckeye Partners declared a quarterly dividend of $1.25 per unit. This was a 4.2% increase from the same quarter last year.
Going forward, Buckeye’s annualized dividend payment is $5 per unit, good for a 7.8% yield.
A major factor for MLPs that have high dividend payouts is whether the dividend is sustainable. In this case, it appears Buckeye has a sustainable dividend payout.
Over the past several years, the company has made significant strides to lower its debt and improve its dividend coverage.
Source: 2017 Annual Meeting, page 18
In the past four quarters combined, Buckeye had a dividend coverage ratio of 1.08, meaning it generated 8% more cash flow than it paid in unitholder dividends.
This indicates the current payout is sustainable, but there is only room for modest dividend growth moving forward.
Furthermore, Buckeye has a debt-EBITDA ratio of 4.54. This is not an alarmingly high level of debt for an MLP, but it does represent a significant amount of debt to service.
All of this means there is less cash flow available for dividend growth. A reasonable forecast for Buckeye’s annual dividend growth is the 3% to 5% range.
Of course, the tradeoff is Buckeye has a very high dividend yield, much higher than many other quality oil and gas MLPs.
Final thoughts
With the price of oil heading back below $50 per barrel in the U.S., investors might be scared off by MLPs. This is particularly understandable given the damage taken by MLPs during the oil and gas downturn of 2014 to 2016.
Regardless, high-quality MLPs like Buckeye Partners have continued to grow their dividends, even with oil prices falling once again.
Buckeye Partners is not likely to be a tremendous growth stock, but it has high appeal for income investors.
The S&P 500 Index, on average, has a 2% dividend yield. Moreover, the yield on the 10-year U.S. Treasury Bond is just 2.37%.
As a result, Buckeye’s 7.8% dividend yield is attractive given the alternatives. Additionally, the dividend appears to be sustainable.
Disclosure: I am long XOM.
