A storied organization in the midstream, Buckeye employs internal initiatives to change its culture. The result: Success at making the most of an expanding industry.

MIDSTREAM: You have considerable experience in midstream management. How has the business changed during your career?

SMITH: My career spans back into the late ’70s so I have witnessed the midstream business go through considerable change. When I started in this industry, the midstream assets were primarily structured as an operating segment of an integrated energy company. In some cases, the midstream assets were secondary to the primary operating focus of these integrated companies and received little focus from senior management.

Now, Buckeye Partners and numerous other midstream companies have evolved as stand-alone businesses with their own identity and growth plans. The transition from a heavily regulated natural gas industry to one more dependent on open markets and competition was also a catalyst to the MLP industry becoming one of the great success stories in American business.

MIDSTREAM: What is Buckeye’s advantage? How is Buckeye different from peers and what makes Buckeye a compelling addition to an investment portfolio?

SMITH: I believe Buckeye is unique because it has a long history of success, well positioned assets, talented employees and a great business culture. Buckeye was founded in 1886 when John D. Rockefeller built the first crude oil pipeline to his Ohio refineries, and we benefit from a rich legacy in the transportation of crude oil and refined products.

Buckeye became the first public MLP in 1986 and is now a diversified petroleum products pipeline and terminal business with both domestic and international operations.

Since 2008, our market cap has increased from $2 billion to more than $8 billion through a number of strategic acquisitions, growth-capital investments and a dramatic change in our culture and strategy. In addition to our 6,000 miles of petroleum product pipelines, Buckeye now owns and operates 115 terminals, including three located in the Caribbean. We recently announced the formal establishment of our new Global Marine Terminals segment, which includes 40 million barrels (MMbbl) of storage capacity in our Caribbean terminals and 15 MMbbl of storage in our New York Harbor marine terminals. These marine terminals are the result of a more recent push to diversify our asset base originating from corporate strategy meetings back in 2009. We believe this has created a new and very robust growth platform for Buckeye.

One of the keys to Buckeye’s success is an initiative that we kicked off in 2009 to change the culture of our work force, as well as our business strategies and processes. We redesigned the Buckeye organization from the ground up to a structure that was more commercial, increased employee empowerment, required more accountability and established a performance incentive compensation program for all employees across the company.

The exceptional performance by our employees really shows in both operating and financial improvements at Buckeye. We improved our balance sheet in 2013 while at the same time generating total shareholder return of 67%. We recently increased our quarterly distribution by about 5% to $1.0875 per unit over the prior year, and we see the opportunity to further increase the growth rate of our distributions if we continue to execute on our business plans.

MIDSTREAM: The analysts seem positive about your story with several recent upgrades. Is this strictly because of improving distributable cash flow or are they encouraged by other developments?

SMITH: We have been successful in significantly improving distributable cash flow and adjusted EBITDA since 2009. But I believe these improving metrics tell only half the story.

Changing business conditions have created numerous growth opportunities for Buckeye. Our strategy is—for lack of a better term—to “modernize” our assets, operations and commercial services to distinguish Buckeye as having the best logistics solutions for our customers.

Our BORCO [Bahamas Oil Refining Company International Ltd.] unit is a great example of this strategy. BORCO, located in the Bahamas, is now one of the most sophisticated marine terminals in the world. We not only completed the first phase of expansion of the terminal to reach a total of 26 MMbbl, we also significantly improved the pumping rates for loading and off-loading vessels, increased the flexibility of the terminal pipe manifolds to allow further product segregation and tank-to-tank transfers, and increased the capacity of the jetties and docks.

We are now employing the same modernization strategy at our Perth Amboy terminal in New York Harbor. Buckeye is close to completing a new pipeline that will directly connect Perth to our Linden, N.J., hub, which is the origination point for our Northeast system. Linden handles throughput of approximately 500,000 bbl/d of refined products.

Our commercial aggressiveness and focus on improved customer services has paid off for our unitholders, and we believe our business model provides us optionality and a competitive advantage moving forward. This commercial success in 2013 was evident in new infrastructure projects completed across our system as well as 3% annual growth in pipeline volumes and over 6% annual growth in terminal throughput volumes.

MIDSTREAM: North America’s midstream infrastructure is undergoing fundamental changes, thanks to the shale plays and Canada’s oil sands. How has this impacted your crude handling business?

SMITH: The shale plays and crude oil sands have had a significant impact on the flow of products in the areas we serve. Our commercial team has had a lot of success in looking at ways to leverage our existing asset base to serve the needs of our customers in moving those crudes to refining centers. Our Albany, N.Y., terminal was an early success story as we were able to repurpose an underutilized ethanol rail facility for crude rail offloading, storage and loading onto marine vessels for transportation down the Hudson River to the Eastern Seaboard shipping lanes.

In addition, our Chicago complex is strategically located at the southern end of Lake Michigan in an area that serves as a busy waypoint for both rail and pipeline traffic. We have identified multiple ways to capitalize on this location and changing crude oil flows. We also have a presence in the Marcellus and Utica Shale plays and are exploring opportunities to utilize existing infrastructure, including rights-of-way and underutilized pipelines, to be a key logistics service provider.

MIDSTREAM: Product demand is changing in the U.S. as gasoline usage slackens and distillate continues to rise. How has that changed what you do?

SMITH: We have seen product demand shift somewhat across our system, but we have continued to identify capital projects to increase our competitiveness and maintain and grow our volumes. Butane blending is an excellent example of how we have been able to maintain strong growth, as strong blending margins have enabled Buckeye to continue to expand the locations that offer this service. We continue to see additional opportunities for expansion of blending capabilities, including at our global marine assets.

Looking at our volumes for the fourth quarter of 2013, we benefited from an aggregate increase of almost 6% across our system with strong growth in distillates and more moderate growth in gasoline and jet fuels. Our legacy terminal throughput volumes also realized over 3% growth.

MIDSTREAM: Buckeye made a major acquisition from Hess at the end of 2013 that fit well with your existing terminal operations. How will this purchase impact Buckeye prospectively?

SMITH: The successful acquisition from Hess of a premier network of 20 petroleum products terminals was a big win. We believe this acquisition is a great opportunity for us to create value by overlaying our commercial and operating model on a strategic platform of assets complementary to our existing assets. Our terminal growth strategy is to commercialize these facilities by expanding their services and capabilities. We will combine this with Buckeye’s focus on improved customer service to also grow our third-party business.

At the same time, we will overlay our operating model, which involves establishing multiskilled entrepreneurial operating teams in a decentralized structure, as I discussed before.

The integration of these assets is proceeding smoothly. We were able to acquire these strategic assets at a reasonable value and expect to reach an attractive acquisition multiple once these assets are fully integrated.

MIDSTREAM: You recently announced operating structure changes that included creation of a global marine unit. What international opportunities are out there?

SMITH: As we focused on integrating the terminals from Hess, we took the opportunity to reassess our existing business unit classifications. We realigned our business units to optimize the growth opportunities by leveraging the synergies related to our management, commercial, operating and financial reporting activities.

Our Global Marine Terminals segment includes assets that primarily facilitate global flows of crude oil, refined petroleum products and other commodities, offering our customers connectivity to some of the world’s most important bulk storage and blending hubs. This segment features the flexibility of large volume, multiproduct segregated tankage and offers heating, blending and marine services while enabling synergies among the different facilities. This segment includes key hubs in the Caribbean, including our BORCO facility, the Yabucoa terminal and the newly acquired St. Lucia terminal.

In addition, certain of our New York Harbor facilities are now part of the global marine segment, including our legacy Perth Amboy facility and two facilities acquired from Hess—the Port Reading and Raritan Bay terminals. We believe these terminals establish for Buckeye a platform for growth opportunities in the global marine markets.

MIDSTREAM: Observers say attractive midstream assets remain on the market. Do you see further acquisitions or do you plan to focus on internal growth?

SMITH: The answer is both. We continue to see midstream assets on the market, as other companies look to divest non-core assets. Our corporate development team is always assessing acquisition opportunities both domestic and international. The question becomes: Can we acquire strategic assets that complement our existing assets and/or provide us with further diversification and can those assets be acquired at the right price?

Our commercial team also remains focused on internal growth capital opportunities. We have spent $1 billion during the past three years on internal growth projects, excluding our acquisitions. These investments have yielded strong returns at attractive investment multiples and have contributed greatly to our success.

Looking forward, we see an attractive backlog of projects that we expect to drive incremental distributable cash flow growth into the future.

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