Buckeye Stays Neutral

We reiterate our Neutral recommendation on Buckeye Partners LP (BPL - Analyst Report). Buckeye Partners is a major contender in the U.S. energy sector with its pipelines business being one of the largest in terms of volumes delivered. The proposed agreement between Buckeye Partners and Chevron Inc. regarding the acquisition of a marine terminal facility for liquid petroleum products will act as a propeller to the partnership’s growth in the long run.

The partnership also made additions to its inorganic asset base by entering into a long-term contract for the construction of an additional 1.2 million barrels of crude oil storage capacity at the Bahamas Oil Refining Company International Limited (BORCO) facility in Bahamas.

However, the partnership’s financial results are influenced by volatility in demand and irregular weather patterns. Moreover, tight environmental and federal regulations also tend to undermine the partnership’s utility operations.

On the positive side, Buckeye is actively engaged in organic growth and cost-reduction opportunities. In the first quarter of 2012, the partnership made capital investments of $74.3 million out of which $13.1 million is allotted for sustaining expenditures and $61.2 million for expansion and cost cutting programs in the future. Buckeye also has a solid financial position which enables it to keep track of its growth momentum and reward unitholders.

Other negatives that might create bottlenecks in the partnership’s stock portfolio includes commodity market risks resulting from price volatilities relating to natural gas storage, decline in unit prices owing to increased competition from other attractive investment opportunities and financial as well as operational risks associated with non-fulfillment of contractual obligations by third parties.

The partnership underperformed in the first quarter of 2012 with both earnings and revenue coming in below the corresponding Zacks Consensus Estimates. On a year-over-year basis, revenue increased marginally by 0.5% to $1,259.4 million while earnings declined by 25 cents to 54 cents per unit in the reported quarter.

The Zacks Consensus Estimates for the second quarter and fiscal 2012 are currently pegged at 66 cents per unit and $2.84 per unit, respectively.

Buckeye Partners presently retains a Zacks #3 Rank which translates into a short-term Hold rating. The partnership’s peers include Williams Companies, Inc. (WMB - Analyst Report) and AmeriGas Partners LP (APU).

Based in Houston, Texas Buckeye Partners, L.P. owns and operates refined petroleum products pipeline systems in the United States. The partnership’s Pipelines and Terminals segment transports refined petroleum products and provides bulk storage and terminal throughput services in the continental United States.