The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Some 65 per cent of the Bahamas Oil Refining Company’s (BORCO) first phase expansion has been leased, with the 1.9 million barrels of new storage capacity already operational set to generate $5-$7 million in extra second half operating income.

Pointing out that BORCO’s ability to meet whatever blending requirements customers wanted gave it a unique competitive advantage, its New York Stock Exchange (NYSE) listed owner said it would invest a further $70-$80 million in the Grand Bahama facility’s further expansion during the 2012 second half.

Addressing an analysts’ conference to discuss Buckeye Partners’ 2012 second quarter results, Clark Smith described the completion of a further 1.1 million barrels of storage capacity at BORCO as “a major milestone reached”.

Confirming that construction of the additional tankage had been completed during the 2012 second quarter, Mr Smith said it and “related infrastructure” had come in “on time and on budget”.

The extra 1.1 million barrels, part of Buckeye’s first phase 4.7 million barrel expansion at BORCO, had already been fully leased by one customer and became operational on July 1.

“Another important milestone reached during the second quarter was the execution of a lease agreement with a major international petroleum company for 1.1 million barrels of storage capacity that was placed into service on July 1, representing the initial phase of our BORCO expansion,” Mr Smith said.

Disclosing that there was “strong customer interest” in using BORCO for crude oil storage, and holding other fuels, Mr Smith said the Bahamian facility had already “leased 65 per cent of the 4.7 million barrels” set to be added in the first phase expansion.

Confirming that the balance of the 4.7 million barrel capacity increase will be phased in, the Buckeye chief executive added: “BORCO is a very strategic growth platform for Buckeye. It’s the hub of our marine terminal growth strategy.”

This, and Buckeye’s continued investment, is good news for the Bahamas - and particularly Grand Bahama, which needs every economic and employment boost it can get.

It again highlights the further possibilities for exploiting the Bahamas’ strategic geographic location, particularly when it comes to acting as a logistics/distribution hub for the Western Hemisphere - something that could spark the creation of new industries and business opportunities.

Mr Smith, meanwhile, said Buckeye knew when it purchased BORCO back in January 2011 that there would be a ‘lag time’ before the benefits of its substantial capital investment in the storage facility bore fruit in terms of increased EBITDA (earnings before interest, taxation,, depreciation and amortisation).

Disclosing that “beginning in the third quarter we will see increased cash flow dollars from this investment”, Mr Smith said Buckeye had increased BORCO’s capacity and redundancy capabilities.

Apart from building an inland dock that would give vessels shelter during a storm, BORCO now also had an offshore dock capable of handling the world’s largest oil and fuel tankers.

Adding that BORCO’s ‘pumping rate” had been “significantly increased”, Mr Smith pointed to its previous 21.7 million barrel capacity, and said: “There is sufficient vacant land at BORCO to double the storage capacity if market conditions warrant.”

Buckeye’s international operations, for which BORCO comprises 90 per cent, were essentially flat year-over-year for both the 2012 second quarter and first half.

Keith St Clair, Buckeye’s chief financial officer, said second quarter revenues for the international operations dropped by $2.6 million year-over-year partly due to continued maintenance on “out of service tankage” at BORCO.

He added that the 2012 second half would benefit from the leasing of these tanks as they came back into service, plus the additional 1.9 million barrels of new storage capacity at BORCO.

Apart from the 1.1 million barrels completed during the 2012 second quarter, another 800,000 barrels of capacity had been completed in the first quarter for another customer and were also fully leased.

Asked about the EBITDA contribution the extra 1.9 million barrels was set to make, Mr St Clair replied: “We would expect to see an EBITDA uptick for the second half of the year of $4.5-$7 million... $5-$7 million is a better projection.

“A lot of that is tied to incremental and ancillary services, like berthing, blending and heating.”

Looking ahead to continued investment at BORCO, Mr St Clair said: “What you’re going to see in the last half of the year is continued expenditure related to the expansion at BORCO. That will be somewhere in the $70-$80 million range.”

Mr Smith, Buckeye’s chief executive, said only 1.6 million barrels out of the total 4.7 million barrel first phase expansion remained to be leased.

With the first phase build-out expected to be finished either by end-2012 or early 2013, Mr Smith said BORCO and Buckeye were already in lease discussions with potential customers, and the company “remains confident we’ll get that capacity leased” before construction completion.

Asked by analysts to detail market demand for BORCO’s services, Mr Smith replied: “I think the conditions are good and improving.

“The interest level and demand we’re seeing for storage at BORCO is certainly ramping up. One of the things that is different now from before is the strength of demand for crude oil storage. It’s very bullish.”

Mary Morgan, head of Buckeye’s international operations, which include BORCO, said customers were showing interest in “a wide range of products” at the facility - both crude oil and clean fuels.

The demand, she added, was “being driven by the capabilities we have at the terminal”, describing BORCO’s services as “sophisticated”.

“This is a competitive advantage,” Ms Morgan said. “We’re talking to a lot of people who have not looked at BORCO before. We’ve been able to lease storage as it becomes available, and will be able to lease storage as it becomes available in 2013.”

Ms Morgan said lease rates had increased for the last BORCO contract signed, and the rates were in line with what Buckeye had expected when it acquired the company.

Pointing out that BORCO could offer clients “increased flexibility” through blending arrangements to meet specific requirements, Ms Morgan said: “That’s what BORCO can offer which no one else can...... We’re able to demonstrate to the market and get the word out about BORCO. That’s a huge plus.”

For the 2012 first half, adjusted EBITDA from Buckeye’s international operations was up 10.9 per cent year-over-year at $62.257 million, compared to $56.153 million in 2011.

Revenues were essentially flat, having risen by less than 1 per cent to $100.603 million compared to $98.065 million in 2011. The same applied to operating income,where 2012’s $38.618 million matched last year’s $38.701 million.

Half-year costs in Buckeye’s international operations, though, were also up 4.5 per cent at $62.045 million compared to $59.364 million in 2011.

When it came to the three months to end-June 2012, Buckeye’s international operations saw revenues fall 4.8 per cent year-over-year to $50.428 million compared to $52.99 million in 2011.

Costs were essentially flat, falling 1 per cent to $32.656 million as opposed to $33.018 million in 2011, which all translated into an 11 per cent operating income decline - from $19.972 million last year to $17.772 million this.

The international operations’ adjusted EBITDA came in flat at $30.591 million for the 2012 second quarter, compared to $30.646 million in 2011.

Buckeye’s capital spending on its international operations totalled $73.499 million for the 2012 first half, compared to $60.385 million last time out. For the 2012 second quarter, capital spending totalled $38.506 million.