Oversold 9% Yielder At 52-Week Lows, Estimates Rising, Long-Term Upside Potential

| About: Plains All (PAA)
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This stock yields 9.29% and is 26% below analysts' average price target.

It has had some rough quarters, but it's in the hottest production region in its industry and has projects coming online in 2017 that should sustain future growth.

Investors with a long-term focus can pick up shares at 52-week lows.

We offer two additional actionable trades to hedge your bet - 1 with a breakeven 12% below the 52-week low.

Have you ever had to hold your nose when betting on the future? Life would be so much easier with a dependable crystal ball, but thus far even Amazon (AMZN) isn't selling any of those.

We came across Plains All American Pipeline, L.P. (NYSE:PAA), a midstream pipeline high dividend stock, on a bottom fishing expedition this week, and its chart is a real stinker - it's hitting 52-week lows and looks oversold on its stochastic chart (although it has looked oversold before on its way down):

(Source: finviz)

We figured that analysts must have been ganging up on PAA, with multiple downgrades, etc., but it's the exact opposite - it has a lot of upward earnings estimate revisions over the past 30 days for Q2 and Q3 '17, and also for full years 2017 and 2018:

(Source: YahooFinance)

After its downward slide, PAA is now 26% below analysts' consensus price target of $32.02. It made us wonder what analysts were seeing that investors weren't agreeing with:

Earnings: You can hardly blame the market for running away from PAA when you see these declines in net income, EBITDA and DCF over the past four quarters.

Revenue grew over the past three quarters, but the other categories all struggled due to weak commodity prices, customers' delayed spending on new wells, which in turn caused volume declines in PAA's assets, particularly in its Supply and Logistics segment, which had a 37% drop in EBITDA in 2016 and struggled further in Q1 '17 due partially to unseasonably warm weather.

In addition, the company did several secondary offerings over the past four quarters in order to fund acquisitions, many of which aren't yet operational, so they haven't kicked in any earnings yet, but the unit count has surged.

There was also a distribution cut, from $.70 to $.55, in Q3 '16.

On top of all of that, management also reduced its 2017 guidance in the Q1 '17 earnings release. Here's what the latest figures are vs. 2016. (The company lists DCF as "implied" on its earnings reports and guidance charts.)

The company is targeting 4.2% EBITDA growth and 8.9% DCF growth. We added the unit figures - if the quarterly payout stays at $.55, the distribution coverage should get back to around 1.01x for 2017, which would be a 12% improvement over 2016's .9x coverage factor:

Here's management's full-year and quarterly EBITDA guidance - it is forecasting a big increase in Q4 '17:

If this works out, it would represent 12% growth in PAA's fee-based segments. Management also is projecting around $2.65B in EBITDA for 2018, which would be a 17% rise:

(Source: PAA Q1 '17 presentation)

Risks: There are plenty of them - decreasing distribution coverage, a higher debt load than peers, a very low operating margin, and a relatively high EV/EBITDA, all of which are detailed in the Valuations and Financials comparative tables further below.

There's also execution risk, if management's plans and maneuvers don't work out, due to industry and/or macro pressures, i.e. - if energy prices rise, fall, or stabilize.

Positive Factors: It's not all gloom and doom for PAA, though - here are some promising features.

New Assets Will Kick in - PAA has several projects coming online in 2017/early 2018 that management feels will return the company to growth:

Location: PAA has well-placed midstream assets in the red-hot Permian Basin, which is emerging as the low-cost US production area, with expanding rig counts and production.

In fact, PAA has its highest concentration of assets in the Permian Basin, and it's the largest midstream crude oil logistics provider in the basin:

(Source: PAA Investor Presentation)

Management also feels that the Permian still has a lot of untapped potential vs. other production areas, with over 210,000 undrilled locations:

(Source: PAA Investor Presentation)

Lower Financing Costs: PAA's general partner, Plains GP Holdings, (NYSE:PAGP), no longer gets paid IDR funds, which lowers PAA's cost of equity.

Debt Decreased in Q1 '17: Management is focused on decreasing leverage - it decreased total debt by 5% in Q1 '17. It is targeting a range of 3.5x to 4x long-term debt/EBITDA leverage ratio. (See more details in the Debt and Liquidity section further below.)

(Source: PAA Q1 '17 Presentation)

Other Important Assets: PAA also has significant mid-continent US and Canadian assets, which are integrated into its systems.

(Source: PAA Investor Presentation)

Distributions: PAA should go ex-dividend again around the end of July. Investors receive a K-1 at tax time - IRA holders should consult their accountants about tax ramifications of holding an LP in an IRA.

(You can track PAA's price and current yield in the Basic Materials section of our High Dividend Stocks By Sector Tables.)

Distribution coverage fell to a very low .8x in Q1 '17 due to the aforementioned drop in DCF:

Looking backward, prior to 2015, PAA's management typically achieved much stronger coverage, ranging from 1.1x to as high as 1.6x. Its coverage factor fell in 2015 and 2016 due to big investments which preceded an industry downturn:

(Source: PAA Investor Presentation)

Options: If you're looking to whistle past the graveyard, and a possible falling knife, we've added this out of the money put-selling trade to our Cash Secured Puts Table.

We chose this long-term January 2018 trade since management is pointing toward the end of 2017/beginning of 2018 for a turnaround. The $22.50 put strike gives you a breakeven of $20.95, which is 11.5% below the 52-week low, and 35% below analysts' $32.02 average price target.

If you're more bullish, but you still want to hedge your bet, there's also a January $25.00 call strike that pays $1.55, allowing you to more than double the $1.10 dividends that should be paid out during the next two quarters.

You can find more details on this and over 20 other trades in our Covered Calls Table, which is updated throughout each trading day.

These are the three main income/profit scenarios for this trade:

Valuations: We've added PAA to this midstream valuations table, which also includes some midstream firms we've covered in recent articles, such as MPLX LP (NYSE:MPLX), Summit Midstream Partners LP (NYSE:SMLP), PBF Logistics LP (NYSE:PBFX), Green Plains Partners LP (NASDAQ:GPP), and Arc Logistics Partners (NYSE:ARCX), and Martin Midstream Partners (NASDAQ:MMLP).

PAA's yield and Price/DCF are right around the average for this group, but, unsurprisingly, it has one of the lowest trailing coverage ratios. It has the lowest Price/Sales, but the highest EV/EBITDA ratio. However, if management's EBITDA growth forecasts materialize, that ratio, along with its coverage ratio, should improve in 2018:

Financials: PAA presently has the lowest operating margin and the highest net debt/EBITDA in the group. Again, if it can execute on its plans, this should improve in late 2017 early 2018, when all of those new assets start kicking in earnings.

Debt and Liquidity: Management is focused on its EBITDA/interest and long-term debt/EBITDA ratios. If it hits its 2018 EBITDA goal of $2.65B, that would give it at least 3.81x ratio vs. its 3/31/17 debt, but it would be better than that, given its quarterly paydowns in the meantime.

All of PAA's long-term debt is at fixed rates, with an average rate of 4.8%:

Summary: Looking back over the past few quarters, and ahead in the next two quarters, there are still short-term headwinds. We rate PAA as a Buy for long-term investors due to its strong presence in the Permian Basin coupled with the potential for a return to solid distribution coverage and growth, as its long-term projects start contributing to earnings in the second half of 2017 into 2018.

Disclaimer: This article was written for informational purposes only, and isn't intended as personal investment advice. Please practice due diligence before investing in any investment vehicle mentioned in this article.

Disclosure: I am/we are long PAA, PBFX, HEP, MMLP, MPLX, ARCX.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: We're long PAA via being short PAA puts.