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Summary

  • Plains All American Pipeline is targeting multiple geographic resource plays with its strategically allocated capital spending budget.
  • The company recently announced the construction of the Diamond Pipeline. The pipeline will have the capacity to transport up to 200,000 barrels per day.
  • In addition, in December 2013, the partnership announced it would invest in different pipeline projects in the Permian Basin.
  • The partnership is all set to benefit in the long term with the strengthening of its existing pipeline infrastructure and fee-based business model.

Plains All American Pipeline (NYSE:PAA) conducts its operations through three operating segments: supply and logistics, facilities and transportation. Through these operating segments the company is positioned to drive strong cash flows, which are supported by 70 percent fee-based revenues and 30 percent margin-based revenues.

The partnership's integrated assets are located in all major crude oil production and liquid rich areas throughout North America. With these assets, the partnership currently handles more than 3.5 million barrels per day of crude oil and NGLs. The crude oil assets contribute approximately 75 percent to the net revenues, while NGL contributes approximately 20 percent to the net revenues. Going forward, the U.S. and Canadian production continues to grow significantly, primarily due to increasing light and medium sweet and condensates, and the partnership is putting efforts into capitalizing on this growth.

Capital Spending Budget

Owing to its capabilities in the storing, transporting, and marketing of petroleum products, the partnership plays an important role in the North American oil and gas markets. The partnership has been putting efforts into strengthening its asset base. To do so, it plans to spend capital budget in the range of $1850 million-$2050 million during 2014. The capital spending program is directed towards providing the company with benefits from high-growth liquids resource plays. In addition, the program will help the company to strengthen its fee-based revenue base.

Source: Investor Presentation

The partnership is currently one of the top providers of midstream assets in almost all of the major crude oil resource plays in North America. The production in the region is expected to grow by 3.9 million barrels per day by the end of 2018 reflecting an increase of approximately 30 percent.

On the other hand, there is still a lack of midstream infrastructure. Keeping that in mind, the partnership recently announced it would construct a new 440 mile pipeline known as the Diamond Pipeline. The pipeline is expected to start from the Plains Cushing, Oklahoma terminal to the Memphis refinery of Valero energy (NYSE:VLO). Moreover, the company plans to connect the pipeline with Valero Energy Partners' (NYSE:VLP) Collierville pipeline. The project is estimated to be completed with an investment of approximately $900 million. Upon successful completion (expected by the end of 2016), the pipeline will have a capacity of transporting approximately 200,000 barrels of sweet crude oil per day. The partnership has supported the pipeline with a long-term shipping agreement with Valero Energy. Similarly, a related contract for storage and terminal facilities was also closed at the Cushing Terminal.

Given the increasing volumes, the partnership has been investing to strengthen its assets portfolio. For instance, in December of 2013 the partnership announced that it would be investing an additional $400 million-$500 million to strengthen its existing pipeline infrastructure in the Permian Basin. The projects are expected to be completed in stages during 2014 and in early 2015. These projects will increase the pipeline capacities to approximately 350,000 barrels per day in Southeastern Mexico and the Delaware Basin. Additionally, the projects will also increase the capacity of the southern portion by over 200,000 barrels per day. Moreover, the partnership is also constructing a 62-mile crude oil pipeline known as the Cactus Pipeline. The pipeline is expected to have a take away capacity of 200,000 barrels per day.

Upcoming Projects to Strengthen the Distribution Base

Plains All American Pipeline has an enviable history of increased distribution growth. Despite fluctuating and volatile petroleum prices, Plains All American has been able to grow the distribution at a compounded rate of 9.5 percent. For 2014, the partnership is targeting a 10 percent increase in the distribution growth.

Concluding Remarks

The partnership has assets in almost all of the major oil producing sites in North America. Going forward the partnership has been investing to expand and further strengthen its pipeline network and other assets. Moreover, with the recently announced Diamond Pipeline, the partnership is set to enhance its capacity by 200,000 barrels of domestic sweet crude oil per day. Additionally, the pipeline is also supported by a long-term shipping agreement with Valero Energy. Given the outlook of production growth, I believe that the partnership has been taking the right steps to benefit in the long term.

Source: Investor Presentation

At current, 70% of the cash flows are being derived from the fee-based revenue sources while the remaining 30% are derived from margin-based business. The concentration on fee-based cash generation has helped the partnership to post distribution growth. It is worth mentioning here that the new projects are also fee-based with minimal commodity exposure. Therefore, it is safe to infer that the addition of new projects will help the partnership to generate predictable cash flows and allow it to grow the distribution in the long term.

Source: Plains All American Pipeline - Strengthening Its Assets Portfolio