Key drivers of the Merchant Services segment
Traditionally, the Merchant Services segment provides wholesale distributor service of refined petroleum products in the U.S. and the Caribbean. It markets a wide range of liquid petroleum products and other ancillary products in areas served by Buckeye Partners’ pipelines and terminals. Its services include the Caribbean fuel oil supply and distribution business and new merchant activities supporting the terminals acquired from Hess. All five terminals of the Merchant Services segment, with aggregate storage capacity of approximately one million barrels, are operated by the Pipelines and Terminals segment.
The segment benefited from the renewable identification number (or RIN), which is generated through ethanol blending and bio-blended diesel activities. The market for RINs experienced a substantial increase in value during the first half of 2013, but declined during the second half of 2013. There was an adverse impact on RIN due to the lowering of the required blend volumes for renewable fuels by the U.S. Environmental Protection Agency (or EPA). Overall, the sale of RIN has been positive for BPL.
However, the refined products market in the U.S. has witnessed decline in the past couple of years due to lower demand in the petro-chemical business. The company has been making an effort to mitigate the risk by implementing a strategy of reducing the refined product inventories in the Midwest and focusing on more strategic and locations that have a higher supply of liquid petroleum.
Adjusted EBITDA for the Merchant Services segment increased substantially in 2013. It increased from $1.1 million in 2012 to $12.1 million in 2013. The increase in profit was realized when the fuel oil supply and distribution services to third parties in the Caribbean began in late 2012.
During 1Q14, contributions from the Merchant Services segment grew as it led more storage at the Buckeye terminals. In particular, the merchant activities increased around the Hess assets subsequent to the acquisition of Hess. BPL added approximately 300 new customers across the newly acquired terminals. As a result, the Merchant Services contribution to the domestic Pipelines and Terminals and Global Marine Terminals segments grew by combined 47% in 1Q14 over same quarter the past year.
Key drivers of the Development and Logistics segment
BPL’s Development and Logistics segment provides turn-key operations and maintenance, asset development, and construction services for a third-party pipeline. The segment operates primarily in Texas and Louisiana. During 2013, EBITDA from this segment improved by 16.6% due to the improved performance from the contract operation of third-party pipelines and propane storage expansion projects.
Earnings at the Development and Logistics segment have grown steadily as a result of a strong project backlog. Production at the Eagle Ford crude oil gathering pipeline began during 4Q13. During 1Q14, the segment received a contract to operate a Permian based pipeline system for a major petrochemical company. These developments helped BPL gain a footprint at the important shale plays. It is expected to be a major growth driver in future.
Buckeye Partners L.P. (BPL) is a master limited partnership operating in the midstream energy space. Buckeye Partners is also part of the Alerian MLP ETF (AMLP) and the MLP ETF (MLPA). BPL is also a component of the JPMorgan Alerian MLP Index ETN (AMJ) and the ETRACS 2xMonthly Leveraged Long Alerian MLP Infrastructure Index (MLPL).