A Blackeye for Buckeye?

Joseph Cioffi  |

Buckeye Partners (BPL) has not been getting any kind of a break lately. This MLP took it on the chin last week when it announced earnings. The company’s earnings were disappointing across the board and there were a couple of flashing red lights to pay attention to.

Margins are shrinking and earnings missed estimates. Those are the obvious but not the most important numbers. Scroll down to the bottom line number, and for MLPs, the bottom line number is distributable cash flow. In this metric, we have an issue. DCF went from $87 million in first quarter of 2011 to $73 million in the first quarter of 2012. The ratio needs to be above 1.00; meaning it needs to take in more than it's paying out.

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Distributable cash flow is the number one metric in MLP land. Everything else is secondary. The payout ration is at 0.78, down from 1.09 a year ago. So in English, the company took in $1.09 for every $1.00 it paid out. That’s a positive. Now in the latest quarter, the company is paying out a buck but only taking in 78 cents. Now sometimes MLPs have seasonal factors that impact DCF where you have to look at the entire year.

Nustar (NS) is one MLP where this is the case. The company over the course of a year will average a DCF over 1.00 (at least so far it has). But something at Buckeye is not right. The company said in its earnings that the environment is challenging. The company says it has positioned itself for improvement later in the year but investors appear to be voting with both feet and the chart shows that the stock continues to move lower and trades closer to its 52-week lows.

We have also seen a slew of downgrades on the stock and some brokerage houses actually have a sell rating on this stock. You don’t see sell ratings too often. The yield is approaching 8 percent, which is 2 points above Kinder Morgan’s (KMP) yield, which is near 6 percent. That 2 point spread is a yellow light flashing and investors should exercise caution here. If the yield begins to move toward 9 percent or 10 percent, it will be the indicator that the distribution is in trouble. We are not there yet.

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The MLP index tried to rally back to 400 and has gotten turned away. Watch that 380 level, which is the low made in early April. If that goes, then we have a serious correction in the group, which could take us down to the 360 level. The next level below that is 320, which is the low from last September. A correction down to that level comes with either a massive spike in 10-year yields (seems unlikely right now) or a severe correction in the overall market.

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