Buckeye Difficulties Left Behind

We are maintaining our Buy recommendation and target price for Buckeye Partners L.P. (BPL) of $47 per unit. Although the partnership reported lower-than-expected earnings during the second quarter, the volatility that drove the Buckeye Energy Services unit to an operating loss appears to be behind the partnership.

Commodity prices have come off its highs and the back half of the year looks to be much stronger for the recently acquired segment. We expect BPL to grow distributions 6% over the next twelve months to an annualized $3.65 per unit led by cash flow growth from the Kirby Hills II expansion and higher tariffs and terminalling fees through 2009.

Our current positive investment sentiment toward Buckeye Partners is due to the value added from the Lodi Gas Storage acquisition, the ability for increased tariff rates/fees to offset demand destruction and the recent pullback in BPL’s unit price.

Currently Buckeye is trading at a distribution yield of 8.70% with a spread over the benchmark 10-Yr Treasury note of 4.90% (490 basis points). At these levels, BPL seems undervalued. Its high-quality fee-based assets make up the vast majority of its cash flows therefore making the partnership low risk in nature.

On a distribution yield basis, BPL has historically traded with a spread of roughly 3.25% (325 bp) above the 10-Yr Treasury. Our price target of $47 per unit implies a 6% distribution growth rate to $3.65 per unit with a distribution yield of 7.75%. This reflects a 350 basis point spread above our 12 month target 10-Yr Treasury yield of 4.25%. The 12-month target price represents an approximate 26% return and further solidifies our current Buy recommendation.

Read the full analyst report on BPL

Read the full analyst report on BPL