Has This Explosive MLP Overextended Itself in 2013?

Ryan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

One of the largest independent US pipeline carriers of refined petroleum products, Buckeye Partners LP (NYSE: BPL) has vastly outperformed the overall market in 2013, rising 46.66% year to date compared to the 12.93% return offered by the blue chip average.

Buckeye is one of the largest independent US pipeline carriers of refined petroleum products, with over 6,000 miles of pipelines. Based on market capitalization, the company is valued at $7.03 billion. Presently, Buckeye possesses a TTM profit margin of 5.94%.

With the company trading within $5 of all-time highs, has this explosive MLP overextended itself in 2013 or should investors flee into this company as a safe haven from the incredibly volatile market?

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Strengths:

  • Institutional Vote of Confidence: 43% of shares outstanding are held by institutional investors, representing over $3 billion in investment, displaying the confidence some of largest investors in the world have in the company and its future
  • Relatively Low Volatility: Currently, Buckeye withholds a beta ratio of 0.30, representing a company trading with considerably less volatility than the overall market, a strength for long-term investors
  • Dividend: At the moment, the company pays out quarterly dividends of $1.05, which annualized gives a yield of 6.31%, a major strength for long-term investors
  • Historic Revenue Growth: In 2002, Buckeye reported revenue of $247 million; in 2012, the company announced revenue of $4.36 billion, representing year over year annual growth of 33.09%, an explosive growth trend which is anticipated to sustain into the future with projections placing 2015 revenue at $5.20 billion (this growth has been a result of aggressive expansion projects by the company)
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  • Reasonable Valuation: Presently, the company possesses a price to earnings ratio of 25.25 and a price to sales ratio of 1.63; both of which indicate a company trading with a fairly reasonable valuation
  • Diversified & Predictable Business Model: Buckeye owns 6,000 miles of pipeline, which the company utilizes to ship refined petroleum products, and because of this the company’s fees are regulated and based on the volume of product transported, not by the price of the commodity they are shipping; with this diversified and predictable business model comes a greater level of security for investors
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Weaknesses:

  • Net Debt: The company’s $6.78 million in cash and cash equivalents is outweighed by its $2.74 billion debt load, resulting in a net debt of roughly $2.7 billion, accounting for 38.40% of total market capitalization, a major financial weakness of the company

Opportunities:

  • Dividend Growth: Since implementing their dividend program in 1990, Buckeye has consistently raised their dividend payouts and is widely anticipated to sustain this trend well into the future
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  • Acquisitions: In July 2012, the company acquired a Marine terminal facility for liquid petroleum products in New York Harbor from Chevron Incorporated; further acquisitions could add to the company’s asset base and fuel growth
  • Growth in Volume: The most important metric for Buckeye is the volume of petroleum products it ships through its pipelines every day, which increased from an average of 1,304,500 barrels of petroleum products per day in 2010 to 1,347,500 barrels per day in 2011; further growth in shipment volume is projected and will fuel growth
  • Growth in Average Tariff Rate: The average tariff rate the company charges has increased from 64.7 cents per barrel in 2007 to 76.8 cents per barrel in 2011, with further growth projected
  • Refined Product Sales: Buckeye has increased its refined product sales from 435.2 million gallons in 2008 to 1,337.8 million gallons in 2011, representing 207.39% growth over three years, with extensive further growth projected in this key metric
  • Growth in US Oil Production: The more oil that is produced in the United States, the more oil that will have to be shipped by companies such as Buckeye, increasing pipeline volumes and fueling overall company growth
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Threats:

  • Falter in Oil Prices: While oil prices do not affect the rate Buckeye charges, weakness in oil prices result in the production companies possessing less conviction as at a certain point the endeavor simply is not profitable; major weakness in oil prices could threaten overall business
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Competitors:

Major publicly traded competitors of Buckeye include Enterprise Products Partners LP (NYSE: EPD)Kinder Morgan Incorporated (NYSE: KMI)Energy Transfer Partners LP (NYSE: ETP), and Enbridge Incorporated (NYSE: ENB). All of these companies have a presence in the pipeline industry and compete directly against Buckeye.

Enterprise Products is valued at $54.03 billion, pays out a dividend yielding 4.56%, and carries a price to earnings ratio of 20.95. Enterprise carries a 4.14 price to book ratio, however the company possesses an increased level of stability as a result of its massive presence across the continent. Fundamentally, Enterprise’s business model is profitable, with a TTM profit margin of 5.90%. Enterprise is anticipated to experience mid-single digit growth in terms of revenue and earnings.

Kinder Morgan is valued at $37.57 billion, pays out a dividend yielding 4.19%, and carries a price to earnings ratio of 46.71. Kinder Morgan possesses an interest in approximately 37,000 miles of pipelines and about 180 terminals, and the company carries a price to book ratio of 2.87. Fundamentally, Kinder Morgan’s business model is profitable, with a TTM profit margin of 5.24%. In respect to earnings, Kinder Morgan is projected to grow in the mid-single digits range through 2015, however revenue is projected to drop from 2014 to 2015.

Energy Transfer is valued at $17.57 billion, pays out a dividend yielding 7.52%, and carries a price to earnings ratio of 30.33. The company carries a price to book ratio of 1.65. Fundamentally, Energy Transfer’s business model appears strong, with a TTM profit margin of 10.87%. The profit margin of the company has decreased substantially from over 50% in 2012 to the current level, and the company’s revenue growth is projected to be choppy in the forthcoming years.

Enbridge is valued at $41.17 billion, pays out a dividend yielding 3.00%, and carries a price to earnings ratio of 57.77. Enbridge possesses a price to book ratio of 5.30. Fundamentally, the company’s business model is slightly profitable, with a TTM profit margin of 2.73%. Enbridge is expected to sustain low-single digits growth, in terms of revenue, through 2015.

The Foolish Bottom Line:

Financially, Buckeye is relatively solid with the exception of its rather substantial debt load. The company possesses stable revenue growth, a growing dividend, and a predictable and established business model. Looking forward, the company is likely to experience moderate to fast-paced growth from its expansion plans and consistent increases in its tariff rates and volumes. All in all, Buckeye is a very strong investment earning four out of five stars, and one that will provide investors with returns that outperform the overall market for years to come, however investors should wait for a considerable pullback as Buckeye appears overbought at current prices. 


Ryan Guenette has no position in any stocks mentioned. The Motley Fool recommends Enterprise Products Partners L.P. and Kinder Morgan. The Motley Fool owns shares of Kinder Morgan. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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