Plains Holdings' Huge IPO Is Coming This Week

Oct.14.13 | About: Plains GP (PAGP)

Plains GP Holdings, LP (NYSE:PAGP), a fossil fuels transportation and storage firm, hopes to raise $3 billion on Thursday, October 17 in its upcoming initial public offering of 128 million shares. The company and their extremely long list of underwriters are expecting a price range of $22.00-25.00. If the IPO can hit the midpoint of that range at $23.50 per share, PAGP would command a market value of $14.2 billion.

PAGP filed confidentially on July 29, 2013
Joint Bookrunners: Goldman Sachs, Barclays, J.P. Morgan
Co-Managers include a huge bevy of firms: BofA Merrill Lynch, Citi, UBS Investment Bank, Wells Fargo Securities, Deutsche Bank, Morgan Stanley, Raymond James, RBC Capital Markets, Baird, Oppenheimer & Co, Stifel, BBVA Continental, BNP Paribas, DnB Markets, ING, Mitsubishi UFJ Securities, Mizuho Securities, Piper Jaffray, PNC Capital Markets, Scotiabank, SMBC Nikko, Societe Generale, Suntrust Robinson Humphrey, BB&T Capital Markets, CIBC World Markets, Ladenburg Thalmann & Co, Regions Securities, Simmons & Co, Stephens, Tudor, Pickering, Hold & Co, US Capital Advisors

SUMMARY
PAGP holds some 128,000,000 units of the limited partner of the Plains All American Pipeline, Plains AAP LP, which in turn has a 100% membership interest in the general partner of the Plains All American Pipeline (NYSE:PAA). The limited partner owns all incentive distribution rights along with an indirect 2% general interest in the pipeline, which allow it to receive approximately 10% of all cash distributed by PAA per quarter up to the cash distribution level of $0.3375 per common unit of PAA and 50% of all cash distributed in the same quarter above the cash distribution level of $0.3375 per common unit.

PAA is engaged in transportation, storage, terminalling and marketing of crude oil and refined products, along with processing, transportation, fractionation, storage and marketing of natural gas liquids. PAA moves approximately 3.5 million barrels of crude oil and natural gas liquids through its pipelines per day. PAA is continuing to grow its North American presence in order to take advantage constantly shifting gas and oil operations, having allocated $1.6 billion in growth capital for 2013 and an expected $1.3-1.5 billion for 2014. The firm has also made some 32 acquisitions at a total price of $5.2 billion in the course of the past five years.

VALUATION
PAGP was formed in July 2013 and therefore has no financial history; the figures below are for the GP LLC, which PAGP will own and control after this offering, for the six months ended June 30, 2013:

Total Revenues: $20,915,000,000
Net Income: $834,000,000
Total Assets: $19,265,000,000
Total Debt: $7,418,000,000
Total Members' Equity/Partners' Capital: $7,451,000,000

PAGP expects to offer an initial quarterly cash distribution rate to be $0.14904 per share, or $0.5962 annually. Though this is a relatively small yield (approximately 2.5% per year given a share price at the midpoint of the expected range as $23.50), there is reason to believe that the yield will increase fairly quickly; PAGP's ownership of PAA's incentive distribution rights gives it significant leverage to grow its distribution disproportionately quickly compared to PAA's common unit distribution, which has itself grown massively since its own IPO.

Since May 2004, PAA has increased its quarterly cash distribution per share by approximately 113%, from $0.28125 quarterly to $2.40 for the quarter ended September 30, 2013.

MANAGEMENT
CEO and Chairman of the Board Greg Armstrong has served as the Chairman and CEO of PAA's general partner since its formation in 1998. He also served as president and CEO of Plains Resources from 1992-2001, and in various other executive roles beginning in 1981.

RECOMENDATION
PAGP is a promising long-term buy for investors who want to own a stable income security with a fairly low but potentially growing yield. While the initial yields are relatively small, the firm does appear well-positioned to increase its cash distributions, and its primary source of income (payouts from PAA) is extremely stable and should be increasing. The value of the firm's shares should also rise over time with the increasing quarterly payments.

This IPO is rated a buy if it prices in the $21 to $23 range or lower.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in PAGP over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This article is neither a recommendation to buy or sell shares, and investors should always do their own research including reading the S-1 and meeting with their financial adviser.