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Ron Hiram, Wise Analysis (216 clicks)
Research analyst, dividend investing, oil & gas, mid-cap
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Plains All American Pipeline L.P. (PAA) reported its results of operations for 4Q 2013 on February 6, 2014. This article focuses on some of the key facts and trends revealed by this report. Given the significant quarterly fluctuations in important business parameters, full year results are also reviewed, in addition to the quarterly numbers.

PAA transports, stores and markets crude oil and refined products; it also transports, processes, stores and markets natural gas liquids ("NGL"). It also owns and operates natural gas storage facilities. PAA's operations are managed through three operating segments: Transportation, Facilities (which includes PNG, PAA's natural gas storage operations), and Supply & Logistics.

Transportation generates revenues through fee-based activities associated with transporting crude oil and NGL on pipelines, gathering systems, trucks and barges. Facilities generates revenues through fee-based activities associated with providing storage, terminal and throughput services for crude oil, refined products, natural gas and NGL, NGL fractionation and isomerization services and natural gas and condensate processing services. Supply & Logistics generates margin-based revenues from sale of gathered and bulk-purchased crude oil, as well as sales of NGL volumes purchased from suppliers (including the sale of additional barrels exchanged through buy/sell arrangements entered into to supplement the margins of the gathered and bulk-purchased volumes).

Overall revenue growth is shown in Table 1 below:

(click to enlarge) Table 1: Figures in $ Millions (except % change); source: company 10-Q, 10-K and 8-K filings

Unlike the Facilities and Transportation segments that are predominantly fee-based businesses, a substantial portion of Supply & Logistics is margin based and hence results are more volatile. In a prior article I noted the drivers behind the extraordinary performance generated by this segment. Management looked at 2012 as a year in which market conditions were extremely favorable for the Supply and Logistics segment and rightly predicted there would be a "return to baseline" in 2013. This occurred as infrastructure additions began to relieve certain of the transportation constraints that had previously created opportunities for favorable crude oil margins benefiting Supply & Logistics.

Segment profits are summarized in Table 2 below. This table illustrates the significant drop in 2013 profits generated by Supply & Logistics occurring, as expected, following an extraordinarily good first quarter. It also illustrates these were largely offset by improvements in the other segments, particularly Facilities.

(click to enlarge) Table 2: Segment Profit, excluding "Selected Items Impacting Profitability"; figures in $ Millions (except % change); source: company 10-Q, 10-K and 8-K filings

PAA's guidance for total segment profits in 2014 is $2,096 million (at midpoint of the range), compared to $2,167 million achieved in 2013. The 2014 target incorporates ~15% increases for the Transportation and Facilities segments, alongside a return to baseline-type performance for Supply & Logistics. The "return to baseline" also explains why Adjusted EBITDA declined in the last 3 quarters of 2013 vs. 2012. I expect 1Q14 will also show a significant decline vs. 1Q13, but it could be somewhat offset by cash flow generated from the $1.62 billion spent on organic growth projects in 2013 (PAA's 2014 expansion capital program stands at $1.7 billion).

(click to enlarge) Table 3: Figures in $ Millions (except % change); source: company 10-Q, 10-K and 8-K filings

PAA exceeded its initial Adjusted EBITDA target for 2013 by over $265 million. In 4Q13 it revised the 2013 target up to $2,242 million (at midpoint of the range). Actual results for 2013 exceeded the revised target by $50 million. PAA projects Adjusted EBITDA will total $2,150 million (mid-point of the range) in 2014. This is ~6% below the level achieved in 2013.

Distributable cash flow ("DCF") reported by PAA and distributions for the periods under review are presented in Table 4 below.

(click to enlarge) Table 4: Figures in $ Millions (except per unit amounts and % change); source: company 10-Q, 10-K and 8-K filings

In 2013, DCF as reported by PAA grew at a slower rate than distributions per unit. To me this serves as a note of caution. However, on an absolute basis DCF per unit in 2013 substantially exceeded distributions per unit. So even if DCF in 2014 declines from $1,665 million in 2013 to $1,540 million, as PAA projects it will, there is sufficient margin of safety to permit the 10% growth in distributions targeted by management for 2014 while maintaining a coverage ratio of at least 1.10x.

In an article titled "Distributable Cash Flow", I present MMP's definition of DCF and also provide definitions used by other master limited partnerships ("MLPs"). Based on this definition, PAA's DCF for 2013 was $1,665 million ($4.85 per unit), up from $1,550 million ($4.73 per unit) in 2012. The generic reasons why DCF as reported by an MLP may differ from what I call sustainable DCF are reviewed in an article titled "Estimating sustainable DCF-why and how". I will calculate sustainable DCF and sustainable DCF coverage, as I define those terms, once PAA provides additional data as part of its Form 10-K for 2013.

Like stocks, MLP valuations can be compared using a variety of performance parameters. Table 5 below presents a comparison of the MLPs I follow based on an enterprise value to EBITDA ratio using latest available trailing twelve months ("TTM") data. While the table provides one measure of relative values, investment decisions should take into consideration other parameters as well as qualitative factors.

As of 02/07/14:

Price

Enterprise Value (EV)

TTM

EBITDA

EV / TTM EBITDA

EBITDA data as of

El Paso Pipeline Partners (EPB)

$31.57

10,985

1,113

9.9

Dec-13

Energy Transfer Partners (ETP)

$54.27

35,960

3,587

10.0

Sep-13

Kinder Morgan Energy Partners (KMP)

$80.17

54,983

5,165

10.6

Dec-13

Plains All American Pipeline

$52.65

25,756

2,168

11.9

Dec-13

Boardwalk Pipeline Partners (BWP)

$24.09

9,168

757

12.1

Sep-13

Suburban Propane Partners (SPH)

$44.24

3,810

307

12.4

Dec-13

Williams Partners (WPZ)

$49.92

29,399

2,290

12.8

Sep-13

Targa Resources Partners (NGLS)

$53.20

8,418

562

15.0

Sep-13

Enterprise Products Partners (EPD)

$65.72

78,770

4,685

16.8

Dec-13

Regency Energy Partners (RGP)

$26.93

8,645

444

19.5

Sep-13

Magellan Midstream Partners (MMP)

$68.32

18,045

845

21.4

Dec-13

Buckeye Partners (BPL)

$73.03

11,039

440

25.1

Dec-13

Table 5: EV and TTM EBITDA figures in $ Millions; source: company 10-Q, 10-K, 8-K filings and author calculations

It would be more meaningful to use 2014 EBITDA estimates rather than TTM numbers, but not all MLPs provide guidance for this year. So far, the ones that I have seen do so have been MMP (at $936 million) and PAA (at $$2,150 million).

PAA currently yields 4.67%, significantly below most other MLPs I follow. On the other hand, in 2013 it increased the number of units outstanding by only 2.7%, inflicting a far lower dilution on its limited partners than most of the MLPs I follow. Likewise, the ratio of long-term debt to EBITDA ratio (currently ~3.3x) is also far lower. PAA has generated excellent operational results and is a solid choice for more conservative MLP investors, especially given that its valuation, as expressed by the EV/TTM EBITDA ratio, seems reasonable when compared to MLPs that have not produced as good results.

A concern of note with regard to PAA is the burden placed on it by incentive distribution rights ("IDRs") held by Plains GP Holdings (PAGP), PAA's general partner. PAA pays 48% of each marginal dollar of DCF it generates to PAGP. For example, in order to achieve a $0.24 (10%) increase in distributions to limited partners (to use round numbers, say from $2.40 to $2.64 per annum), PAA needs to generate a $0.46 increase in DCF per limited partner unit. While the IDR burden is less of an issue with respect to organic growth (because of the relatively low ratio of required investment to the expected cash flow it will generate), it is a major factor in the case of large acquisitions that, under current market conditions, command high multiples and require lengthy time periods to generate the projected synergies. It could place PAA at a disadvantage compared to peers such as EPD and MMP. Nevertheless, I consider PAA to be a high-quality MLP and would continue to accumulate on weakness.

Source: Preliminary Review Of Plains All American Pipeline's Q4 2013 Results