Plains All American Pipeline, L.P. (NYSE:PAA) NAPTP 2013 Master Limited Partnership Investor Conference Call May 22, 2013 9:00 AM ET
Greg Armstrong - Chairman & CEO
Good morning. In an effort to keep things on time, we’ll go ahead and get started with our next presentation. I am very pleased to introduce Greg Armstrong; Chairman and CEO of Plains All American Pipeline. For those of you that aren’t familiar which I am sure pretty much everybody is, Plains All American Pipeline at the PAA level owns or operates over 18,000 miles of pipe; probably at this point over a 115 million barrels of storage. In our opinion, one of the most geographically diverse vertically integrated MLPs. And certainly everything all encompassing from the wellhead to the burner tip as it relates to crude oil and associated liquids.
So with that I’ll turn it over to Greg.
Good morning. As has probably been the case for the last couple of presentations, our [lawyers] aren’t here in body, but they are here in spirit and they send their regards. Today's presentation, I will break it down into four component parts. First is introduction to PAA for those that are not familiar with PAA. Talk a little bit about the environment that we are operating in right now in the foreseeable future so we will talk about crude oil market fundamentals and then we will talk about PAA’s strategic positioning with respect to that market outlook and what that translates into in terms of capital investment opportunities. And then I will finish with a financial overview and just a few take away points.
From a structure standpoint PAA like many of the other MLPs has a typical structure, but in PAA's case there's two exceptions; one, we do have a majority controlled interest in another publicly traded partnership called PAA Natural Gas Storage which is just a 100% focused in on the natural gas storage business and then the other element of as you see on the upper right hand side of the slide is unlike other entities we do not have a public GP nor do we have a GP that's controlled by any one given party. We have a very diverse set of owners; a very long term oriented and focused and the dropdown box below the GP shows that they have been very supportive with respect to acquisition transactions when it comes time to modifying their incentive distribution rights to facilitate the accretion of an acquisition early on to the limited partner holders.
As [Dave] mentioned, very large asset footprint, 18,000 miles of pipelines, large portion storage, a diverse set of assets with respect to providing transportation from the wellhead we move it by truck, by train, barge, tug, and just about any other way that we can if there's not margin in it we will use people and buckets, but and right now there's quite a bit of margin in the crude oil business.
From a financial profile, we are just short of [$20 billion] in total assets and enterprise value excluding our General Partner of right at [$26 billion] and we are rated BBB flat, BAA2. We provide a significant amount of public guidance in our 8-Ks if you haven't seen that I would encourage you to take a look at it. For this year we are projecting the midpoint of our guidance range has adjusted EBITDA of $2.16 billion and adjusted net income about $1.4 billion.
We conduct our activities on four product platforms, crude oil, natural gas liquids, refined products and natural gas storage; far and away the largest component of our activities is on the crude oil platform that's where I’ll spent most of my time talking about today. That probably represents in the area of 80% to 85% of the product related activities.
We conduct our business through three segments, supply and logistics, facilities and transportation. The latter two facilities and transportation are fee based activities; that's where the majority of our capital expenditures are being made and to the chart to the right you can see the green and the light green represent those two fee based segments. And steady increase in the fee based activities and we expect that to continue for a number of years based upon the capital that we have already spend or in the process of spending.
I would also point out that all three of our segments are underpinned by significant asset presence; even our supply and logistics that is not fee based it is what we call margin based. That will actually take title to the product there to wellhead, send it simultaneously at a major delivery location and then we simply manage that gross margin by transporting the product ourselves either on our own pipelines or assets or the assets of others.
Overall, we expect our baseline activities, for fee based activities to about 75%, during periods when there are high volatile conditions that are favourable for our business because again our supply and logistics enables us to capture that. You can see there is what we have is what we call outsize performance during those years; we have had a series of years that’s been the case. We typically refer to that as non-baseline activities and as you will see later in the presentation, we retain that element of the cash flow and reinvest in the businesses as opposed to using it for distributions.
PAA has been through a number of cycles; we went public in 1998, separated from our E&P colleague in 2001, what you see on the left here is the type of environment we have been operating in since 2001; we seen oil prices as high as $140 a barrel and as low as in the 30s. We have seen severely back related markets and contango markets in the middle chart and then you seen basis differential widely very and even more so of late.
In addition, during that 10 year, 11 year period we have seen production increases, as the demand go up and then come down, we have seen production continue to go down on a decade long trend and then about four years ago, reverse and started an upward trend of production and we've seen the United States go from being a net importer of refined products to net exporter. Throughout all those tumultuous times, what we've seen is PAA has provided guidance and then delivered on that guidance.
So the upper chart in the middle, the green reflects the adjusted EBITDA guidance that we provided at the beginning of each year and the yellow represents the amount of over performance against that guidance in 2013, we certainly haven't finished the year, but we've already increased our guidance for the year from $2.25 billion to $2.160 billion at the midpoint and then the chart that you see in the lower part of that middle section represents the quarterly guidance that we provided and then our performance in red against that range that you see in the background and we've actually performed inline with or exceeded guidance now for over 44 quarters.
Let’s talk a little bit then about the crude oil market fundamentals. The first thing I would leave you with on this slide is that if you could pick anywhere in the world that you wanted to be in the crude oil, midstream business, it would be in North America and we refer to Canada and U.S. as really one market with some regulatory complications. In the upper left hand side of the chart, you see the world’s top 10 oil producers. The U.S. is the third largest in the world and Canada is the fifth largest.
More importantly, in the upper right hand side of the chart, what you see is that in the last four years, the United States has added more production, had a larger production increase than any other country in the world in terms of the top 10 and Canada has been the number two and so if you add those two together, it's been a very significant increase. And again if you view that as one market, if you view U.S. and Canada together, we're actually right up there with the largest producing country in the world which is Russia and Saudi Arabia and the bottom chart just shows kind of how the progression of those production increases have happened over the four year period.
In our view and this is based upon our internal assessments, we estimate that we will continue to see significant increases in production in North America; between year-end 2008 and year-end 2012 we saw an increase of 2.9 million barrels a day; we forecast through the end of 2016 and that that’s going to increase an additional 3.4 million barrels a day, so a fairly significant increase and that’s going to really play a major role in the discussion we are about to have about what it does to infrastructure.
The source of those production increase are very well diversified, you can see on the bar chart on the right, the left hand version, the one right, that is coming from the three big shale resource plays, Permian Basin, Eagle Ford and Bakken as well as Canada certainly, but we have also seen significant contributions from the Mid-Continent and also from the Rockies. An important takeaway that I will mention a little bit later on in the presentation is that not only is there a volume metric increase but there is going to be a clear emphasis on increasing light sweet production at the roughly 3.4 million barrels a day of production increases that we see, 2.4 million barrels of that we think is going to be comprised of condensate and light sweet crude oil production which is probably going to over balance the market with respect to demand for that type of product.
This just shows you really where the increases are coming from geographically and what you see also in the colored boxes there are the current level of production and what the current forecasted level of production is going to be, or increase in those areas and how that represents as a percentage of the current production. So we start seeing forecast of 65% or 100% increases in the case of Eagle Ford clearly there's not that much slack in the pipeline system right now to accommodate that type of rapid increase in production. Plains as well as many of its peers are rapidly developing those transportation alternatives, the combination of pipeline and in some cases rental facilities and also building terminals to be able to accommodate the varying grades of crude that have come out of there. So the takeaway from this slide is rapid increase in production, good geographic diversification where that's located at, but you are going to need a lot of capital to be able to transport that to build the infrastructure and transport that product from the well head to the refinery inlet.
In the last couple of years because of this rapid increase in production that's already taken place we've seen significant spreads develop at each of these areas relative to foreign imports and because in most cases all of this so far has been a volumetric issue and in other words volume just exceeded pipeline take away capacity that relegates you to the next alternative which is to move it by truck or by rail which is much more expensive and not so surprisingly in many cases those differential then widen out to transportation alternative to get that to market as new pipeline infrastructure is developed across those differentials tend to come in but then as production is continuing to increase in many cases you are always playing catch up in addition to the volumetric issue we started to see a transition to where quality issues become a part of the equation and we expect that to play a more dominant issue as we go forward.
This just gives you a feel for where the pipeline flows, where existing pipelines are currently directing those to markets many of them only toward Cushing and toward the Gulf Coast and you will see that there's limited pipeline capacity to take this type of production to the east or west coast and that's played a big role in what the differentials been between WTI and Brent. There are a number of projects, some of which we are involved in some of which we are not to try and solve the imbalance on the volumetric basis in either of these areas, some of these projects will take place some of them will take place on a delayed basis and we think several of these projects probably will not take place as we use our crystal ball to try and forecast our capital program we of course have to take into consideration the activities not only of ourselves but those of our peers and so we've got a pretty good feel for most of these projects. What we have seen though is that trying to get pipelines built to the east or west coast can be very challenging certainly time consuming and always frustrating. And what we've part of our solutions we've invested significantly in rail because rail provides the ability to take those volumes as well as the particular unique qualities to the east and the west coast and so you are seeing a significant investment in rail infrastructure.
Our view is that rail will probably play a fairly significant role in balancing the market for the next four to five years, after that five-year period it will still play a role but it will be on a much reduced basis and again primarily relegated to servicing east and west coast. As I mentioned earlier about the quality issues we import roughly about 6.5 million barrels into North America, the preponderance of that is located in the Gulf Coast and what you can see is over the last several years at the very bottom of this chart, this chart at the bottom shows the different grades of imports that we bring into the US and the red bars at the bottom represent the component that is light sweet. You can see we've almost phased out completely the light sweet crude oil production that we've been importing and then yet to the upper right hand side of the slide what you see is we've got about 2.4 million barrels a day of light sweet crude oil production that we believe is going to come to market. Clearly that’s going to overwhelm some of the refineries that are set up to run heavy sour crude and it's going to require kind of a all of the above type solutions to balancing the market to move it from different regions as well as in some cases to split it and export certain components because at this point in time, we are not permitted to export significant volumes like sweet crude.
So the overall takeaway on the industry environment is that we expect to see continued solid growth. We expect attractive crude oil and liquids prices to support the ongoing drilling activities. We do believe there will be fits and starts. We think there will be (inaudible) prices. We will simply just have to give up a little bit of ground. We will see a slowdown in drilling in certain areas, the volumes will balance and we’ll see a pickup in that and then on a regional basis, we're going to continue to see a build out of pipelines. Each of the areas will be very unique. There will be the macro issues that's going on in the United States and then on a regional basis, you may see periods of robust activity in one area and yet another areas it maybe a little bit depressed and depend on what the differential are for transportation as well as for quality. So with that as background, lets talk of our PAA’s position relative to that. This is a similar map to what you saw earlier showing the production growth by area. What we've done here is we've overlaid in red and purple our pipeline assets. Important takeaway here is PAA is located with significant presence in all the major producing areas of shale and resource play. So you really don’t have to pick which company is in which area. We're in all the areas and we have a very large presence in every one of those areas. We have, over the last four years, invested significantly in these areas. We've invested about $7 billion between 2009 and 2012 to service those midstream assets. A lot of midstream needs, a lot of those projects are not yet at full revenue generating capacity. So there is a lot of momentum in the system for us to continue to harvest growth out of existing capital investments that have already been made.
In addition to that we are this year spending $1.4 billion on additional midstream projects. You can see there is good diversity within this asset mix, there is no one project that exceeds 15% of the total, so that means basically we are very well insulated against any given project been either behind schedule or perhaps on a cost overrun that won’t actually affect our guidance as we go forward because there is so much good diversity there. Just a couple of examples of what we are doing and why the projects are significant yet not that expensive is in Mid-continent area you can see that we have got an existing pipeline network there represented by the grey. The green areas represent the extension that we are making to build out to some of these new resource producing areas and we are also in top part of that chart you see a light blue line that’s the White Cliffs pipeline, we own 36% of that pipeline and we will be twining that pipeline and bringing more crude in from the Rockies to the Mid-Continent area.
Cactus pipeline, this is one we just announced a few weeks ago, it will actually be connecting our pipeline system in West Texas the Permian area to our pipeline systems in the Gulf Coast area, it allows to bring in some of the heavier and sour crudes from West Texas into the Gulf Coast area of South Texas to meet the refiners need. We’ll actually in many cases be backing out additional foreign imports of heavier sour crudes. And then we have got on top of that, we have got our rail assets that really provide us to substantial flexibility to that only wheel volumes literally across United States but also to wheel particular types of volumes as we see areas that become over saturated and light sweet crude we’ll be able to move those out as the discounts get wider to move those to the east and west coast as well as the other parts of the Gulf Coast.
Organic growth cap you can see we have been increasing our spending there, it averaged about $425 million for 2006 through 2010 and 2011 it was $500 million last year it was $1.2 billion this year we have targeted about $1.4 billion. In addition to organic growth we also have been very active historically in acquisition and continue to be able to do so. We can see here we have done $10 billion worth of acquisitions over the last 11 years. In some years we may do only two or three, but they are large in other cases we may do 10 and they are small. But we are always active in that area, we’ve averaged about $900 million a year and acquisitions for the last five years. So let’s talk about how we are going to play for all this activity. We have a very disciplined and well established financial growth strategy. I won't read out the numbers here too, but bottom line is we are trying to stay very, very flexible, high liquidity and very healthy financial position. Our targets for debt-to-EBITDA are 3.5 to 4, we are currently running right around three times so we are well within that metric; our debt-to-total cap is running, is targeted to be about 50% or less and we are running about 46%. I mentioned earlier that we rated Triple B flat, BAA too. What you see on this chart is that we have been adhering to that financial growth strategy for quite some period of time despite a significant period of growth.
The yellow bans on each of those charts represent the range that we have targeted to be in with respect to that credit metric and the fact that the red line are showing that we are either below the top of that or far below it shows that we are basically in a very good position relate to those credit metrics. So significant liquidity and significant strength and balance sheet; that’s reiterated here on this chart right here, where you can see the credit metric. Again right now we currently have $2.8 [billion] of total liquidity.
In addition to your typical cash flow sources, we retain quite a bit of that for our own use. We've been growing our distribution at roughly about a 7% to 8%, average growth rate recently is stated to around 9% to 10% and yet we've been retaining significant cash flow. As you can see between 2012 and our forecast for 2013, we expect to retain over a $1 billion, right out of $1 billion I should say and that will be reinvested back in the business. This year we are looking at a 9% to 10% growth in our distribution and distribution coverage is about 135%.
That retained cash flow plus our ability to access the equity market through a continuous equity offering program where each day we sell a certain amount of equity at market prices, there's two things for us, it really allows us to sell fund if you will all of our projects and even moderate-sized acquisitions without having to go to the market for a secondary offering or some sort of mark-to-market offering which minimizes disruption, but it also saves us a lot of money. The typical friction cost associated with an overnight marketing or a fully market offering can be in the neighborhood of 5% to 7%.
These ATMs roughly we can execute at market prices at roughly around 1%. So it’s very attractive there. We believe currently that we will not have to access the market for overnight or marketed offerings absent any large acquisitions which always are a pleasant surprise, these are always accretive transactions. So we are in very good shape financially going forward to continue to fund this high level of activity without having to rely on marketed transactions.
Put all that together in a package, it’s resulted in fairly we think impressive growth, 28% growth compound and EBITDA since 2001, 7.7% compound annual growth rate in the distribution and total returns you can see at the bottom there on the five year or 10-year basis of PAA compare very well to almost any industry metric and our peers.
So wrapping up in terms of tell you the story on plains and a few bullets, great assets and the right positions we are in almost every basin that there is where significant resource growth. We've got the cash flow that we have is durable and predominantly fee-based, proven business model as you saw earlier throughout just about any element of the cycle, a very strong balance sheet, significant liquidity and then strong visibility for continued growth not only from the investments that we've already made but the investments that we are currently making and expect to make and distribution growth last year was 9%, this year we are looking at 9% to 10%. We haven't yet provided guidance for the future, but you can safely assume with the 135% coverage this year retaining $400 million. We've certainly got room to continue to grow as well as the contributions that we have from the assets that would be coming on stream.
So with that, I think we've got time for a few questions.
Just in the aggregate in the future do you see any of these particular plays that are getting over provided the takeaway capacity or will reach a point where it’s going to exceed the production?
I think the nature of the beast is we always tend to over supply any market at any given point in time if you give enough of this enough time. I think areas that in the near term as an example in the Eagle Ford right now production is about 700,000 barrels a day that compares to 2009, it was about 30,000 barrels a day. So it's been a very rapid growth in production. There's currently either constructed or under construction pipeline projects totaling about 1.2 million barrels. So just if you compare current to that 1.2, it’s clearly going to be over supplied. Our forecast four years from now suggests that production in the Eagle Ford is probably going to be in the neighborhood of 1.4 to 1.6 million barrels a day.
So I think the answer to your question is, yes. In an interim basis, there will be periods of over supply of transportation capacity, but ultimately if the area is developed the way we believe it will be, we will actually need some more pipeline capacity. So it's going to ebb and flow but again that’s typically the case. We never, as an industry, have been able to get just in time transportation service to meet the needs partly because we don’t really have enough information from the producers to be able to get it aligned correctly.
I saw from you (inaudible) assets in Western Canada. Can you talk about the situation up there given Keystone XL [Palman] marketing come up there?
I can’t. With respect to Canada and the Keystone XL, to be clear, if Keystone XL was not built, it would actually probably better for our business. As an American though, we should build it and we should get the politics out of the way, much better to import crude oil from a friendly country than from an unfriendly, great commercial, somebody had a while back, it said a good neighbor brings you a [couple share growth], a great neighbor brings you 2.4 million barrels of crude a day.
Somehow we didn’t get that story and watched it, but I think the longer that it takes to buy the Keystone getting built, the more likely we're going to see increased capacity of rail coming in to the United States because right now we're gearing up to have heated cars to bring and there is certainly a massive need for that particularly type quality of crude in the U.S. It actually gets us blending stock to blend with this light sweet crude that we're going to have at excess of.
So out there I think if it should get built, two years ago I would have told you it was going to get built and I thought as soon as the election was going to be over that it would be just a matter of time. I was right, just a matter of a lot of time, but overall I think Canada is going to continue to produce the volumes we are forecasting almost a 1 million barrel a day increase over the next four years. I think ultimately if we don't start play nice, we are going to force them to build pipelines to go to the West Coast to be able to access markets so they can rely on and that’s sad testimony to our government.
So hopefully there is no question here.
Are there any new initiatives in terms of products you see in the next two to three years for PAA?
No quote initiatives, but certainly one that we have been focusing on spend quite a bit of capital here recently is in the natural gas liquids. Again it lends itself to some of the same complexities and inefficiencies that we lack about crude oil and people look at us little bit crazy when I say that. We actually make money basically helping solve market inefficiencies. And so you are going to see I think an oversupply of certainly propane and possibly even butane for the next several years, that’s going to require more storage to balance the market on both the seasonal basis and I tell you can get some of the export facilities developed.
So we have purchased a fairly large asset from BP in 2012 for $1.6 billion, it got us a lot of pipeline and storage capacity for NGLs and so you will continue to see that be a major growth platform for us there. Natural gas, we certainly have a presence in it and we think the next two years to be difficult, but we think five to seven years out it looks pretty promising and so we’ve got a fairly good backlog if you will up in coming type opportunities to complement what we see is a robust period in crude oil.
Any more questions?
If not, I will conclude. Thank you very much.
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