IPO Preview: Plains GP Holdings, L.P.

Oct.15.13 | About: Plains GP (PAGP)

Based in Houston, Texas, Plains GP Holdings, L.P. (NYSE:PAGP) scheduled a $3 billion IPO at a price range mid-point of $23.50, for Thursday, October 17, 2013.

Four other IPOs are scheduled for this week. The full IPO calendar can be found at IPOpremium.

S-1 filed October 7, 2013.

Manager, Joint Managers: Barclays, Goldman, JPMorgan, BofA Merrill, Citigroup, UBS, Wells Fargo.

Co-Managers: Baird, Oppenheimer, Stifel, BBVA, BNP PARIBAS, DNB Markets, ING, Mitsubishi UFJ, Mizuho, Piper Jaffray, PNC, Scotiabank-Howard Weil, SMBC Nikko, SOCIETE GENERALE, SunTrust Robinson, BB&T, CIBC, Ladenburg Thalmann, Regions, Simmons, Stephens, Tudor.

Summary

PAGP is an Incentive Distribution Rights (see below) carve-out from the parent, Plains All American Pipeline, L.P. (NYSE:PAA), which has a $17.5 billion market cap.

The yield on the parent PAA is currently 4.7%. The projected yield for PAGP (the public portion of PAA's Incentive Distribution Rights) is 2.5%, which will increase if PAA's growth continues.

Valuation

Valuation Ratios

IPO Mrkt

Price /

Price /

Price /

Dividend

12 months ended 6/13

Cap (mm)

Sls

Erngs

BkVlue

Yield

Plains GP Holdings, L.P. (PAGP)

$14,241

n/a

n/a

n/a

2.5%

Plains All American Pipeline, L.P. (PAA)

$17,500

0.4

10.7

19.4

4.7%

Click to enlarge

Glossary

Recommendation

The current rating on PAGP is positive. PAPG is a big IPO and we don't see much downside risk. Because of expected Quantitative Easing from the Fed interest rates should stay low, which is a positive for PAPG. As long as the market is stable at least, PAPG should be bought on the IPO, with moderate to low expectations.

To put the conclusions and observations in context, the following is reorganized, edited and summarized from the full S-1 referenced above:

Business

PAGP's parent - Plains All American Pipeline, L.P. with a $17.5 billion market cap - is carving out its Incentive Distribution Rights (IDRs).

Plains All American Pipeline, L.P. (Plains) is engaged in the transportation, storage, terminalling and marketing of crude oil and refined products, as well as in the processing, transportation, fractionation, storage and marketing of natural gas liquids (NGL).

21% of the IDRs are being offered on the IPO, as Class A stock. The only asset of PAGP is its 128 million shares of class A common stock in the Identive Distribution Rights vehicle, PAGP.

See organization chart here.

Incentive distribution rights (IDRs)

IDRs are the risky frosting on the distribution cake and only get paid if minimum distributions are exceeded by the parent: IDR payments are explicitly tied to distribution growth of the parent.

The yield on the parent PAA is currently 4.7%. The projected yield for PAGP (the public portion of PAA's Incentive Distribution Rights) is 2.5%, which will increase if PAA's growth continues.

PAA's IDRs and its indirect interest in PAA's 2% general partner interest entitles PAGP's stockholders to receive (through several corporate vehicles, see organization chart) without duplication:

•15% of all cash distributed in a quarter after $0.2250 has been distributed in respect of each common unit of PAA for that quarter;

•25% of all cash distributed in a quarter after $0.2475 has been distributed in respect of each common unit of PAA for that quarter; and

•50% of all cash distributed in a quarter after $0.3375 has been distributed in respect of each common unit of PAA for that quarter.

PAGP owns 21% of the incentive distribution rights from the parent, PAA, through several corporate vehicles.

5% stockholder pre-IPO

"Existing Owners" refer to the entities and individuals that own capital interests in AAP and GP LLC including, but not limited to, PAA Management, L.P. ("PAA Management") and certain entities and individuals affiliated with Occidental Petroleum Corporation ("Oxy"), The Energy & Minerals Group ("EMG"), and Kayne Anderson Investment Management Inc. ("Kayne Anderson").

See organization chart here.

Use of proceeds

PAGP will distribute the expected IPO proceeds of $2.9 billion to the existing owners, see above.

Disclaimer: This PAGP IPO report is based on a reading and analysis of PAGP's S-1 filing, which can be found here, and a separate, independent analysis by IPOdesktop.com. There are no unattributed direct quotes in this article.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.