Buckeye Partners, L.P. (BPL) is a master limited partnership, which up to a couple years ago, was one of the hottest sectors in the U.S. energy sector.
When the shale boom began nearly a decade ago, many new companies listed as MLPs and other long-time energy firms spun off MLPs because of the unique tax advantages they offer firms.
Basically, for the investor, you are considered a business partner, and the company must distribute revenue to its partners. It’s similar to the set-up of a real estate investment trust. The bottom line is, MLPs usually throw off big dividends, even if there isn’t a great deal of growth.
The problem is, if the MLP’s payout ratio goes sideways. Basically, the payout ratio is dividends divided by net income. A number less than 1 is highly desirable.
When the oil market fell, that meant net income fell, but the dividends usually have an inverse relationship to the price of the stock. So, as stock prices fell, dividends took off. But those payout ratios went through the roof.
When that happens, MLPs usually have to step in and cut or eliminate their dividends, which further drives the stock down because most investors like MLPs because of their juicy dividends.
That is what has killed a lot of stocks — and companies — in the U.S. oil patch in the past few years. And it wasn’t just exploration and production companies, but it was also pipeline companies.
Pipeline companies make their money moving oil and petroleum products through their pipes. They’re like toll collectors; the more traffic, the more they make. When oil demand slackens, their revenue is hit and that means payout ratios can get dicey.
BPL’s Time-Tested Endurance
But the thing about BPL is, it isn’t a newcomer to the energy patch. It’s celebrating its 130th anniversary this year. It was the first pipeline company for John Rockefeller’s upstart Standard Oil, transporting oil from the fields near Lima, OH, to Standard Oil’s refineries nearby.
That means it has seen the oil booms and busts play out time and again. It also means that BPL knows how to build a solid business that can weather any storm.
And that is precisely what BPL has done during this current slump. It has a solid book of clients and it has come through the worst of this tough market surprisingly well.
When it reported fourth quarter and full year 2015 numbers in February, it posted substantial gains over the year ago quarter and fiscal year. That is no easy feat these days. Not even the big integrated oils can say they did the same.
What’s more, BPL’s stunning 7.3% dividend yield is increasingly solid, making it a stable pick in today’s shaky market.
Richard Band’s Profitable Investing advisory service helps retirement savers outperform the market without losing a minute of sleep along the way. His straightforward style and low-risk value approach has won seven Best Financial Advisory awards from the Newsletter and Electronic Publishers Foundation.