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Plains All American Pipeline, L.P. (NYSE:PAA) offers a compelling investment to investors seeking stable distribution income and income growth. The company offers a 5% distribution yield. The distributions are increasing quarter by quarter. In this article I will highlight why Plains All American is a stable enterprise with growth prospects that should increase the annual distribution yield in future years.

Business Model

To fully understand Plains All American Pipeline, L.P. , it is best to remember that Plains All American Pipeline is neither a producer of crude oil, liquefied petroleum gas, and other natural gas-related products. The partnership is not a consumer in the energy sector. Plains All American Pipeline is, in essence, merely an intermediary in the transportation and storage, and marketing of the petroleum products.

In fact, even its operational assets are mostly controlled by subsidiaries, meaning that its operations are handled by other companies under its wing. This reduces the business of Plains All American Pipeline into three simple segments: 1) transportation of the petroleum products from producer to consumer or storage, 2) Facilities, meaning storage, and 3) supply and logistics, which is the transportation of the petroleum products to the end consumer.

Business Strategy Strengths

At the end of the year 2011, Plains All American Pipelines acquired a crude oil and condensate gathering system in South Texas and a Canadian trucking company. In February, Plains All American Pipelines also announced its plans for a 177 mile pipeline to help in the rise of volume of crude oil from the Mississippi Lime in northern Oklahoma and southern Kansas

With these three new acquisitions at the start of 2012, it is already clear that there is both more production of petroleum products as well as a demand for it. The demand for the petroleum products are well established and Plains All American provides the transportation services to move the product to the consumer from southern Texas all the way to Canada.

By reducing the business to its basics, Plains All American Pipeline has streamlined the flow of petroleum products to its advantage. In using a simple hierarchical business model of the Plains All American Pipeline at the top, and all its subsidiaries performing the heavy work, the company has become efficient in its performance. This can be noticed by constant growth initiatives. The stock chart has moved up significantly during 2011. The stock prices were just fluctuating between $58 to $65 for the whole of 2010, then interest spiked in 2011. With more acquisitions and growth along the way for Plains All American, 2012 looks bright for the company.

Competitors

MarkWest Energy Partners, LP (NYSE:MWE)

MarkWest is a publicly traded Delaware limited partnership. The partnership was established in January 2002. The company is a midstream partnership focused upon typical midstream operations and functions. These include gathering, processing and transportation of natural gas; the transportation, fractionation, storage and marketing of natural gas liquids (NGLs); and the gathering and transportation of crude oil.

Core markets are in four key segments. These include Gulf Coast, Southwest, Northeast, and Liberty. Distributions continue to increase as their assets are strategically located in the U.S.

Kinder Morgan Energy Partners, (NYSE:KMP)

Kinder Morgan Energy Partners is a leading pipeline transportation and energy storage company. Operations are in N. America. Kinder Morgan Energy Partners' midstream assets include transporting natural gas, refined petroleum products, crude oil. In addition, Kinder Morgan Energy Partners had an interest in twenty nine thousand miles of pipelines and one hundred and eighty terminals.

Kinder Morgan Energy Partners' parent is Kinder Morgan (NYSE:KMI). Kinder Morgan receives General Partner incentive distribution rights, which make owning Kinder Morgan the preferred way to own the Kinder Morgan complex. Kinder Morgan's dividends grow at a faster rate based upon Kinder Morgan Energy Partners distributions.

The Pipeline Systems of Plains All American Pipeline

In fact, in this business model, the transportation segment is pretty much given independent control. For example, Plains All American Pipeline has equity earnings in Butte, Frontier, White Cliffs and Settooon Towing, but no controlling interest whatsoever. While it owns physical assets for transportation, PAA is also not afraid to lease equipment for its purposes.

What Plains All American does control with an 87% undivided joint interest is the Basin Pipeline System. Through this asset, the throughput in the Basin Pipeline reached an estimated 378,000 barrels per day in 2011, near enough the maximum capacity of the pipeline, which is at 400,000 barrels a day. The pipeline connects Jal, New Mexico to West Texas, from West Texas to Colorado, Wichita Falls or Cushing, and from foreign or Gulf of Mexico to Wichita Falls. Add to this the asset named after the company, the All American Pipeline that ships the oil from California offshore facilities that connect it straight to refinery markets in California.

With these two pipeline systems alone; PAA can be busy enough for any business. By reducing their responsibilities and sometimes even controlling interests in transporting petroleum products outside their pipelines, the focus remains with the pipelines. And the flow of the products through their pipelines in turn can lend more business to their subsidiaries, transporting the product even without Plains All American control, motivated only by the profit that PAA can bring.

There are other pipelines under Plains All American's control though. There is the connection at Las Flores coming from Santa Ynez, servicing ExxonMobil (NYSE:XOM). Another system is at Gaviota to Point Arguello. The Line 63 system moves crude oil from the San Joaquin Valley in California to the Los Angeles Basin or to Bakersfield. PAA holds more pipelines than this - again, a testament to the simplified business model by adding subsidiaries under Plains All American that can move the petroleum products outside the pipeline systems to the buyer's destination, to a processing plant or to storage.

Plains All American Growth Prospects

Plains All American has created a partnership with a diverse and valuable asset base. Per the below chart, investors can note what analysts are projecting for unit distribution growth and unit price appreciation.

Plains All American Distribution History

Here is a table with the steady and growing distribution of Plains All American distribution history:

The growth of the distribution is key to have a rapidly growing yield on cost. Investors should try to avoid stagnant distributions and focus upon sustainable and growing distributions.

The Effects of a Simplified Business Model

First of all, the focus of the business becomes clearer. Without too many details bothering the management of Plains All American, long term goals are more easily identifiable, obstacles more clearly seen, and solutions simpler. By that alone, the business model is already worth its salt, and for the whole year of 2011 continuing on to 2012, it has earned that value.

Another effect of the simple business model is that even the annual reports are easily understood by investors. If one takes a look at the annual statement of assets, income and liabilities of Plains All American, the items are clear, and there is no need to use non GAAP methods to make it appear like the business is profitable. By the sheer definable bottom line, Plains All American is profitable, and it has the numbers to prove it. This in turn leads to more investor confidence - an easily understood financial statement with a clearly profitable bottom line is always a find.

Finally, management responsibilities are simplified. Even with day to day operations, the process is simple - move one product from one location to the other. And even if there were traffic n the pipelines or delays in delivery over land, strategically placed inventories can always hold the surplus and let the business flow continuously, without much risk of bottlenecks in delivery. All these benefits from one simple adjustment - a concise business model to handle only what is important, and subsidiaries to handle the details.

The effect is an efficiently run business when it is simplified, the responsibilities of management kept within the abilities of the people in charge. And instead of too much work for one person, business or subsidiary, the result is simpler work all around, a simpler business, and a more profitable one.

Action

I advise investors to accumulate Plains All American units over the coming years. The business model is sound, stable, and offers income growth. The midstream master limited partnership is based upon a toll booth strategy.

I do recommend investors hedge their positions to limit downside risk. The units have risen noticeably over the past year. Simple hedging can control capital losses.

Source: Buy Plains All American Pipeline For Dividend Growth