Buckeye Partners, L.P. valuation in doubt since late 2011

Jun 18th, 2012 – Comment

I think that the lesson to be learned from this case is that when we own stocks we need to stay up on the data stream for information and opinions that could affect the price.


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Lou,

Could you please comment on the extreme down slide of Buckeye Partners.
Larry

 

Hey Larry,

Thanks for the assignment. Buckeye Partners,L.P. (BPL NYSE) owns and operates pipeline systems and also earns revenue operating pipeline systems for others. The rub on the company has been that it has been investing in growth mostly by issuing debt and equity which add an implied risk to the safety of the distributions that investors expect.

Some of the other factors that need to be considered are the downgrade by Moody’s to negative in April based on their concern about the amount of financial leverage BPL has employed. Finally the company was denied a rate increase on a substantial portion of its system putting a constraint on revenue.

Ron Hiram a contributor to Seeking Alpha has been voicing caution with regards to BPL since late 2011. It would be worth your while to review his analysis given that he was absolutely right that the value of the shares were suspect.

A review of the charts will help answer some of your questions regarding the sell off that has compromised shareholder wealth.

 

The three-year chart depicts a stock that was trading sideways in a range, with support at $55.00 and resistance at $62.50. In late March of 2012, just days before the regulator denied the company’s request for a rate increase,the MACD and RSI both signalled that the momentum was shifting towards selling. Also worth mentioning is the death cross that surfaced in mid March.

 

The six-month chart clearly illustrates the shift to selling signalled by the MACD and RSI in March. The breach of support at $55.00, that followed the release of disappointing Q1 results in early May, was also forewarned by the MACD and the RSI.

Currently BPL caught a bounce off a hard bottom at $45.00 and is meeting resistance at $50.00. With a dividend yield of 8.3%, which was closer to 9% at the lows, you can see why investors made of stern stuff were buyers.

I think that the lessons to be learned from this case include on the one hand that when we own stocks we need to stay up on the data stream for information and opinions that could affect the price. Finally we must watch the technical signals for opportunities to profit or preserve capital.

Make it a profitable day and happy capitalism!

 

 

 

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