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PG&E Corporation (PCG), PAA Natural Gas Storage, L.P. (PNG): A Deeper Look Inside the Hidden Assets of Buckeye Partners, L.P. (BPL)

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I’ve been taking a deeper look at Buckeye Partners, L.P. (NYSE:BPL)‘ three business segments. In today’s final article we’ll take a deeper look at Buckeye Partners, L.P. (NYSE:BPL) services. This segment includes a variety of assets including natural gas storage, energy services, and its logistics business. Overall this segment represented just 5% of the company’s second-quarter adjusted EBITDA; however, don’t be fooled by that small number because this is still an important segment for the company.

Natural gas storage
Buckeye Partners, L.P. (NYSE:BPL) acquired its Northern California natural gas storage asset in 2008 for $442.4 million. Lodi Gas Storage has 30 billion cubic feet of working natural gas storage capacity and serves the greater San Francisco Bay area by providing gas to PG&E Corporation (NYSE:PCG)‘s system. The problem with its storage business is that it loses money and through the first half of the year has taken $7.5 million away from the company’s adjusted EBITDA.

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Source: Buckeye Partner’s

Natural gas storage is an interesting business for the company given the rest of its petroleum-focused assets. Basically, Buckeye Partners, L.P. (NYSE:BPL) rents the capacity at this facility so that its customers can serve the San Francisco and Sacramento markets thanks to its access through the PG&E Corporation (NYSE:PCG) system. This is a slightly different model than other storage companies that actively trade or market capacity to make money on the summer to winter pricing spreads. For example, PAA Natural Gas Storage, L.P. (NYSE:PNG) has more than 90% of its capacity leased to third parties, which leaves a little left over for merchant storage.

The reason Buckeye Partners, L.P. (NYSE:BPL) is losing money on its storage business is due to the spreads its earns on the gas that is being stored. According to the company, these spreads have been negatively affected by “the difference in natural gas commodity prices for the periods in which natural gas is injected and withdrawn from the storage facility (i.e., time spread)”. Until this spread improves the segment will continue to be a small drag on Buckeye’s profitability.

Energy services
Buckeye’s energy services segment has more than 70 years of market expertise and it is one of the largest wholesale distributors of refined petroleum production. It acquired the bulk of its assets back in 2008 when it acquired Farm & Home Oil Company for $142.2 million before divesting of the retail assets for $52.6 million. The assets consist of five terminals and 1 million barrels of storage capacity in addition to having more than 2.5 million barrels of capacity under contract with Buckeye’s pipeline and terminal business.

Energy services’ core business is to market refined petroleum products in the areas served by the pipeline and terminal business; the contracted capacity helps Buckeye to maximize the utilization of those assets. The other thing to note about this business is that it exposes Buckeye to commodity price risk, which has hurt it in the past and is why Buckeye Partners, L.P. (NYSE:BPL) has been working to shrink this business and mitigate that risk. What investors need to make note of is that this low-margin segment contributes just 3% to the company’s adjusted EBITDA despite the fact it contributes more than 65% of the company’s revenue. This segment is more about maximizing its assets than maximizing margins.

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