Plains All American Almost Makes It Look Easy

May. 8.12 | About: Plains All (PAA)

With crude oil production increasing across North America and differentials going both wide and volatile, these are pretty interesting times to own pipeline, storage, and terminal facilities. As one of the best in the business, Plains All American (NYSE:PAA) continues to reap the benefits of the network it already has, while also putting even more money into its expansion plans.

Little To Fault In Q1

Plains All American has a pretty good reputation for sustained growth, and this publicly-traded MLP delivered again this quarter. Revenue rose 20%, with 47% growth in the Facilities segment boosted by acquisitions. Transport saw 15% top-line growth, while Supply saw 19% revenue growth.

EBITDA (or in this case, adjusted EBITDA) is the more relevant metric when assessing PAA's business, and this metric grew 35% this quarter (just shy of management's reported adjusted growth rate). Transport's 21% growth was helped by both higher tariffs and higher tariff volume (up about 5%). Facilities grew 15% as volume increased 18% and offset a 3% decline in per-barrel profits - a slightly disappointing performance overall . Last and by no means least, Supply surprised with 68% EBTIDA growth, fueled by per-barrel profit growth of 61% (on those aforementioned differentials).

Good Times For The Sector

It's true that a rising tide lifts all boats, and Plains All American is certainly benefiting from a supportive operating environment. To that end, while Enterprise Products Partners' (NYSE:EPD) reported growth in Q1 was not quite as strong (EBITDA up 20%), it is a much bigger company and still surpassed estimates. By comparison, the smaller Magellan Midstream (NYSE:MMP) saw slower adjusted EBTIDA growth (up 9%) that just met consensus expectations.

With oil production on the way up in North America, there's no reason to expect any quick reversal in these trends. Oil production in the lower 48 states has been steadily increasing for roughly seven years now, and there's still reason to expect increased throughput from areas like Eagle Ford, Permian, and Bakken.

Looking To Go From Strength To Strength

Plains All American is already well removed from its starting point as a company built around supplying the landlocked Midwest with crude oil to supply its refineries. Management has used judicious M&A and growth capex to build its national footprint and add assets - including last year's $1.7 billion purchase of BP's (NYSE:BP) Canadian NGL business.

Along with first quarter earnings, management has bumped up its expected growth capex expenditures to close to $1 billion. While some investors may worry that the company is stretching its balance sheet too far, the reality is that PAA's balance sheet is pretty healthy, growth capital is pretty cheap right now, and if they don't expand their terminals, gathering systems and so on, rivals like Enterprise and Kinder Morgan Energy Partners (NYSE:KMP) will. The Bakken in particular would seem to be ripe for more expansion in gathering assets, as producers are having to resort to expensive rail transit to get their oil to market.

The Bottom Line

There's a lot to like about Plains All American, particularly from the perspective of balanced growth and the ability to exploit geographical price differentials. What I don't like is the very high general partner (GP) burden at this company. Although it has not prevented this company from posting good NAV growth for a number of years, nor a healthy dividend today, it is a factor that serves to increase its overall cost of capital.

I like PAA's geographically well-placed assets and the midstream crude business in general. That said, even above-average distributable cash flow growth projections don't result in a fair value that makes these units look cheap. I won't quarrel with investors who believe that buying a quality company like Plains All American at fair value will work out over the long term, but there are other names like Enterprise Products and Enbridge Energy Partners (NYSE:EEP) that at least deserve some consideration as well.

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