Plains All American: Takeaways From Q3 Results

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About: Plains All American Pipeline, L.P. (PAA), Includes: MMP
by: Power Hedge

Summary

Plains All American saw every measure of profitability increase significantly year over year.

One major reason for this was the increased production of resources in America's major basins, especially the Permian.

The company's net income was boosted by a one-time transaction that involved the partial sale of the BridgeTex pipeline system to OMERS.

The company's distributable cash flow in the quarter was far more than what was needed to cover its distribution, which may ultimately result in a distribution increase.

On Tuesday, November 6, 2018, American pipeline and midstream operator Plains All American Pipeline, L.P. (PAA) announced its third quarter 2018 earnings results. The initial headline numbers here were certainly appealing as the company managed to beat the expectations of analysts on both the top and bottom lines. A closer look at the company's results reveals that it is benefiting from many of the same positive trends that some of its peers have been benefiting from. Overall, there is certainly a lot to like here, and the company's limited partners should be generally pleased with the performance of their company.

As my long-time readers are no doubt well aware, it is my usual practice to share the highlights from a company's earnings report before delving into an analysis of its results. This is because these highlights provide a background for the remainder of the article as well as serve as a framework for the resultant analysis. Therefore, here are the highlights from Plains All American Pipeline's third quarter 2018 earnings results:

  • Plains All American Pipeline brought in total revenues of $8.792 billion in the third quarter of 2018. This represents a 49.70% increase over the $5.873 billion that the company had in the year-ago quarter.
  • The company reported an operating income of $493 million in the most recent quarter. This represents a substantial increase over the $44 million that the firm had in the third quarter of last year.
  • Plains All American Pipeline had average transportation volumes of 6.015 million barrels per day. This represents a 12.62% increase over the 5.341 million barrels per day that it transported in the same quarter of last year.
  • The company reported an adjusted EBITDA of $636 million in the third quarter. This compares quite favorably to the $489 million that the company reported in the prior year quarter.
  • Plains All American Pipeline reported a net income of $710 million in the third quarter of 2018. This represents an enormous 1994.11% increase over the $34 million that the company reported in the third quarter of 2017.

It seems quite likely that the first thing that anyone perusing these highlights is likely to notice is that essentially every measure of profitability increased compared to the year-ago quarter. One of the biggest reasons for this is the same as what has been benefiting most of its other midstream peers. That is the booming production that we have seen all across North America but quite prominently in the Permian. As I have discussed in previous articles, most recently this one, production in the Permian has been surging over the course of this year and has now surpassed 3.5 million barrels of oil equivalents per day.

Source: Energy Information Administration

Naturally, this new production needs to be moved to the market somehow, and this is where Plains All American Pipeline comes in as it owns pipelines that are used to move the produced resources to refineries and other processing operations. As stated in the highlights, the company transported an average of 6.015 million barrels of oil per day during the quarter, an increase of 12.62% year over year. Plains All American states that the majority of this increase was from its systems that are serving the Permian basin.

Plains All American makes most of its money by charging its customers a fee for each unit of oil or gas that they move through the company's pipeline systems. Thus, it should be fairly obvious how an increase in volumes would result in a similar increase in revenues, which would migrate down to the company's profits as long as costs do not increase too much. This was largely the case here. The company states that, as a whole, its commodities unit delivered year-over-year adjusted EBITDA growth of 7%, which certainly supports this conclusion.

In a recent article on peer company Magellan Midstream Partners (MMP), I discussed how that company saw its results beneficially affected by the partial sale of the BridgeTex pipeline to OMERS, a Canadian pension fund that benefits Ontario municipal employees. Plains All American Pipeline was also a party to that deal as it sold 30% of its original 50% interest in the pipeline. As was the case with Magellan, Plains All American realized the proceeds during the quarter and also recorded a gain on sale against its earnings. In this case, the company received $862 million and recorded a gain on sale of $210 million. This gain naturally boosted the company's results, which was partially responsible for the huge surge in net income that we saw during the quarter. While this $210 million was not a non-cash transaction and actually does represent new money coming into the company, it was a one-time event, and investors in the company should not expect to see similar performance from Plains All American going forward. Most likely, the firm's net income will decline somewhat in the fourth quarter.

As I have discussed in a few previous articles, net income is not the best measure to use to evaluate the performance of a master limited partnership like Plains All American Pipeline. This is because it is subject to all manner of non-cash adjustments, most notably depreciation and amortization, that do not accurately reflect the ability of the business to generate cash or cover its distributions. Rather, an alternative financial is used, distributable cash flow, which is a non-GAAP figure that theoretically represents the amount of cash generated by the business's ordinary operations that is theoretically available to be paid out to its limited partners. In the third quarter of 2018, Plains All American reported a distributable cash flow of $0.55 per common unit, which is a notable increase over the $0.41 per common unit that it had in the third quarter of last year. This is also more than enough to cover the company's declared $0.30 per unit payout, which is always nice to see.

The company's estimates of its performance in the fourth quarter are also similarly encouraging. It stated that it expects to have a full-year distributable cash flow of $1.840 billion in 2018, which would be a 40.24% improvement over the $1.312 billion that it had in 2017. This distributable cash flow would also work out to $2.31 per common unit, which would give the company a distribution coverage ratio of 1.93. This actually is one of the higher coverage ratios in the MLP space and gives us a significant amount of confidence that the company can maintain its distribution at its present level and in fact can probably increase it somewhat going forward, particularly given the increasing strength in the sector.

In conclusion, this was a relatively solid quarter for Plains All American Pipeline as the growing production in North America results in a growing volume of goods flowing through the company's pipelines. This is similar to the situation in which essentially every other pipeline company finds itself. Plains has the advantage of a very solid distribution coverage ratio though, which gives us a lot of confidence that it will be able to maintain and likely increase its distribution going forward. Overall, there is a lot for investors to be satisfied with here.

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

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.