Plains All American Pipeline's (NYSE:PAA) unit performance has been a bit disappointing over the last year. Though the master limited partnership returned 6% year-to-date, the twelve month return just stands at a meager 1%.
Compared to other pipeline businesses, Plains All American Pipeline exhibits only a mediocre return. The company performed much better than Kinder Morgan Energy Partners (NYSE:KMP), for instance, but was hugely outperformed by Energy Transfer Equity (NYSE:ETE) over the same time period.
Over a one-year performance measurement period, Kinder Morgan Energy Partners lost 11% of its value and Enbridge Inc. (NYSE:ENB) 1%. Energy Transfer Partners (NYSE:ETP) gained 20% while units of Energy Transfer Equity skyrocketed 61%.
3 key themes supporting an investment in Plains All American Pipeline
Strong market presence
Plains All American Pipeline owns 18,000 miles of active pipelines, has a liquids storage capacity of more than 115 MMBbls and a natural gas storage capacity of approximately of 93 Bcf.
Plains All American Pipeline's assets are located in North America and are connecting the most relevant shale plays to in-demand storage- and refinery capacity. The following graph shows that Plains All American Pipeline is greatly positioned to benefit from projected crude oil production growth in Western Canada, the Gulf of Mexico and the first-class shale theaters Eagle Ford, Permian and Bakken.
(Source: PAA 2014 Credit Suisse Energy Summit Presentation)Click to enlarge
Strong growth record
Master limited partnerships often grow via acquisitions which makes it paramount that companies have good execution skills, a nose for sniffing out value and an ability to integrate acquisition targets. Since 2001, Plains All American Pipeline has spend around $10 billion in acquisitions. The graph below depicts the scale of Plains All American Pipeline's aggressive growth strategy. The MLP currently (that is, at the end of fiscal year 2013) exhibits a long-term debt to adjusted EBITDA ratio of 3.1, indicating that the company has not gone overboard with debt-financed acquisitions.
(Source: PAA 2014 Credit Suisse Energy Summit Presentation)
In addition to an attractive asset footprint and a strong drive to grow its asset base over the last thirteen years, Plains All American Pipeline is a cash flow strong company that passes substantial amounts of cash through to its partners.
Annualized distributions have increased by an annualized compound growth rate of over 8% since 2004. Plains All American Pipeline currently pays partners $0.615 quarterly/$2.46 annually and the company has repeatedly stated its ambition to increase annualized distributions by 10% in 2014.
I have previously pointed out that PAA's outstanding distribution record makes this pipeline company a serious alternative to Kinder Morgan Energy Partners or other high-yield resource plays (for instance, Seadrill (NYSE:SDRL))
From a comparative perspective, Kinder Morgan Energy Partners still offers investors the highest distribution yield -- thanks to a Barron-induced sell-off at the end of February. However, Plains All American Pipeline's 4.5% yield clearly is not too shabby and much higher than the 3%+ yields offered by Enbridge or Energy Transfer Equity.
(Source: Achilles Research, Yahoo Finance)
Master limited partnership investors looking for a solid alternative to Kinder Morgan Energy Partners should consider Plains All American Pipeline. The company has a very attractive asset footprint connecting the most relevant shale plays in the U.S. to much needed storage- and refinery capacity. The MLP has also implemented an aggressive growth strategy, that ultimately led to consistent distribution increases over the last decade. Since 2004, annualized distributions have increased from $1.20 to $2.40: A hike of 100% and further distribution increases are likely down the road, especially with the shale business booming as it already is. Plains All American Pipeline also reported an eleven-year distribution coverage ratio of approximately 130% alleviating investor fears about unsustainable distributions. Strong, long-term BUY.
Disclosure: I am long KMP. 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.