S&P Lowers Outlook on Buckeye Partners (BPL) to Negative Following Q2 Results

Standard & Poor's Ratings Services said it affirmed its 'BBB-' corporate credit and senior unsecured ratings on Buckeye Partners L.P. (NYSE: BPL) and revised the outlook to negative from stable.

Buckeye's Energy Services business reported a $26 million loss in second–quarter 2014, which influenced our outlook change. The Energy Services business distributes wholesale refined petroleum products in the Northeast and Midwest. However, the business introduces backwardation risk, and notably, pricing risk, too. The volatility arises from risks that Buckeye must endure but cannot control, such as the early or late planned closure of a refinery (which could increase or decrease refined product prices across Buckeye's delivery points with Buckeye caught short or long, respectively).

Buckeye's merchant services contracted for a clean product storage position at the BORCO facility in first-quarter 2014. The initiative was put in place to leverage the company's handling and blending capabilities at BORCO to provide gasoline supply to the Southeast and to New York Harbor. Although Buckeye intended to exit the storage position upon execution of new storage agreements with third-party customers, those negotiations moved faster than anticipated. To exit its position and to make storage capacity available for third parties at BORCO, Buckeye incurred losses of about $19.5 million on the liquidation of inventory due to weakening prices.

"The ratings on Buckeye reflect a business risk profile that we consider 'satisfactory' due to its relatively stable cash flow from its pipeline and terminal segments, a strong competitive position in Midwestern and Northeastern markets, and improving geographic and customer diversity," said Standard & Poor's credit analyst Aneesh Prabhu.

Buckeye's pipeline and terminal operations represent about 75% of EBITDA. The pipeline and terminal segment operates more than 6,000 miles of pipeline systems, moving more than 1.3 million barrels per day. The pipelines are well positioned to serve Northeast markets, which have favorable demand, as well as Chicago-area refineries and Midwestern markets, where the partnership's competitive position is strong. The partnership has nearly 100 liquid petroleum product storage terminals throughout the U.S., with total storage capacity of about 42 million barrels.

The negative outlook reflects a significant drop in Buckeye's distribution coverage, and the underperformance of its Energy Services segment and BORCO facility. Debt levels also have peaked, with thinning cushions from financial covenants. Still, investor confidence did not appear to erode after two recent successful unit offerings. However, the issuance puts more pressure on Buckeye to bring distributions coverage back in line with investor expectations. We expect the debt to EBITDA ratio (covenant calculation) to peak at about 4.85x before settling at about 4.6x in 2015.

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