Is Plains All American A Good Investment?

May.20.14 | About: Plains All (PAA)


Solid growth in the cash distributions and distributable cash flows makes it an attractive investment.

The partnership's assets in the Permian Basin and Eagle Ford Shale will be the key growth drivers over the next few quarters.

The partnership has been able to complement its organic growth with acquisitions.

Plains All American Pipeline (NYSE:PAA) engages in the processing, transportation, marketing, and storage of crude oil and natural gas liquids. The partnership operates in three segments: Transportation, Facilities, and Supply and Logistics and owns 18,100 miles of active pipelines in the region. The unit performance of the partnership remained sluggish during the last year; however, the trend has changed and it has gained almost 10% year-to-date. Moreover, the revenues have shown significant improvement during the last year due to increased exposure in the Permian Basin and Eagle Ford Shale. The fee-based business activities of the partnership has been integral in the growth of cash flows and distributions to the unit holders - the partnership's current quarterly cash distribution is up 180% from the levels of its first quarterly cash distribution.

General Partners and Distributable Cash Flows

The partnership's general partner interest is held by Plains All American GP LLC which owns 2% royalty in its distributable cash flows.

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Source: SEC Filings

Distributable cash flow is probably the most important figure when it comes to measuring the performance of any partnership. For a partnership to maintain healthy growth in cash distributions; it is vital to have strong growth in distributable cash flows. Plains All American has shown impressive growth in its distributable cash flows over the past five years - the partnership has grown its distributable cash flow at an average annual rate of 26% over the past five years. The increase is mainly due to the increased revenues from the fee-based business segments of the partnership. The partnership has heavily invested in Permian Basin and Eagle Ford assets that will provide great opportunity to increase its transportation and processing margins in the coming years. Over the last year, the partnership reported distributable cash flow of $1.66 billion, which is up 7% compared to the last year. The partnership received a boost from the impressive performance from the BP NGL Acquisition completed in 2012 as well as incremental fee-based contributions associated with organic and non-organic growth.

The increased distributable cash flows over the last year resulted in higher cash distributions per unit to the unit holders. The partnership has a strong history of increasing its cash distributions after almost every two quarters and has increased its quarterly distribution by 180% to its current level of $0.63 per common unit, and to $2.52 per common unit on an annualized basis since it went public. Moreover, Plains All American has shown solid revenue growth over the past three years and this growth has been converted into cash flows, resulting in continued growth in cash distributions. The partnership reported over $42 billion in revenues in the last year, which is up almost 12% from previous year. The increase in revenues has come from the geographically diversified assets of the partnership.

Since 2011, Plains All American has spent around $10 billion in acquisitions which is reflected in its substantial increase in revenues and cash flows. Moreover, the partnership has set a target to grow its distribution by 10% during the current year.

Positives and Possible Negatives

The increased production volumes from the Permian Basin and Eagle Ford Shale has presented opportunity for the pipeline businesses - Plains All American has its assets in the two regions that will suffice the increasing transportation and storage demands of the E&P companies.

Moreover, the partnership effectively planned a major portion of its capital budget around the two assets. The investment leads to several expansion projects that will add around 700,000 barrels per day [bpd] to 840,000 bpd of pipeline capacity in the Permian Basin and add up to 15,000 bpd to the Eagle Ford projects. Further, the partnership allocated $740 million in order to increase and expand the pipeline infrastructure in the Permian Basin and $95 million for Eagle Ford pipeline capacity expansion in 2014. The crude oil production in the Permian basin averaged 1.32 million bpd in the last year and is forecasted to grow more than any other region through 2015. The table below shows the expansion plans that are included in the capital plan of 2014.

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Source: SEC Filings

Despite impressive growth in the Permian and Eagle Ford shale reserves, the partnership reported a weak first quarter earnings as compared to the same period last year. The net income attributable to Plain All stood at $384 million, down 27% from the same period last year, and EBITDA for the first quarter stood at $607 million, down 19% year-over-year. However, the results showed significant improvement from the last quarter with net income and EBITDA showing an increase of 21% and 15%, respectively. These results reflect continued growth in fee-based Transpiration and Facilities segments, driven by execution of Plains All American's expansion capital program.


Plains All American has one of the best track records of growing its cash distributions. The partnership has assets placed in extremely attractive areas that will allow it to enhance its distributable cash flows and return more cash to its unit holders. We believe Plains All American will be a solid long-term investment.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. IAEResearch is not a registered investment advisor or broker/dealer. This article was written by an analyst at IAEResearch and represents his/her personal opinion about the companies mentioned in the article. The article is for informational purposes only and it should not be taken as an investment advice. Investors are encouraged to conduct their own due diligence before making an investment decision. I am not receiving any compensation (other than from Seeking Alpha) for this article, and have no relationship with the companies mentioned in the article.