Buckeye Downgraded to Underperform

We downgrade our recommendation on Buckeye Partners L.P. (BPL - Analyst Report) to Underperform from Neutral in view of highly volatile fuel and diesel prices which could negatively influence the partnership’s top-line growth. Besides, risks associated with rate cases involving jet fuel transportation tariff and execution of market rates on petroleum supply could act as potential negative catalysts to growth.

Buckeye Partners’ Energy Service business took an 8% revenue hit in the second quarter 2012 and we believe the Energy business would continue to face market challenges lest prices of jet fuel and diesel recover significantly in the coming quarters. This could be compounded by the exposure to usual generic threats including environmental compliance costs and unplanned pipeline outages as seen in the second quarter 2012.

Buckeye Partners’ bottom-line over the last four quarters trended down and missed our estimates by huge margins. We are skeptical about the partnership’s performance in the forthcoming quarters. The partnership is slated to release its third quarter financial report card before the market bell on November 1, 2012.

However, significant asset acquisition, solid financials and development of large-scale storage facilities, which are cornerstones of Buckeye’s growth, could moderate the strong negatives.

The partnership expects these high-profile asset integrations and well-executed projects in the pipeline and terminal as well as storage businesses will put it in the path of a balanced growth trajectory.

The Zacks Consensus Estimates for the third quarter and full year 2012 presently stand at 73 cents per unit and $2.69 per unit, respectively. The partnership’s chief competitor, Oklahoma-based The Williams Companies, Inc. (WMB - Analyst Report) is expected to report its third quarter financials on October 30, 2012.

Buckeye Partners has a Zacks #4 Rank (Sell rating). Based in Houston, Texas, Buckeye Partners L.P. is a publicly traded partnership that owns and operates one of the largest independent refined petroleum products pipeline systems in the United States in terms of volumes delivered.