Entering text into the input field will update the search result below

Plains All American Distributions And Unit Price Offer Upside In An Oil Market Recovery


  • Plains All American units have fallen out of favor after years of distribution cuts.
  • Over the past four and a half years, distributions have fallen by 74%.
  • Higher oil prices and increased completion activity in the Permian basin will drive positive operating leverage.
  • We believe PAA’s distributions and unit price can increase by 50% to 100% over the next two to three years.
  • Looking for a portfolio of ideas like this one? Members of HFI Research MLPs get exclusive access to our model portfolio. Learn More »

Investment Thesis

Plains All American Pipeline, L.P. (NASDAQ:PAA) units have fallen lower than warranted based on fundamentals. Unitholders have soured on management after having experienced five years of distribution cuts aimed at shoring up PAA’s balance sheet and maintaining its investment-grade rating. Units today are priced as if a recovery in distributions is a lost cause.

PAA’s asset portfolio is heavily weighted toward oil infrastructure in the Permian basin. An oil-market recovery will increase Permian midstream throughput and bring about positive operating leverage for PAA that is likely to increase its distributable cash flow.

Over the next two to three years, we believe PAA will generate enough free cash flow to increase its distribution by at least 50%, and as much as 100% amid a robust increase in oil production. Unit prices are likely to follow with 50%-to-100% appreciation. With PAA units currently yielding a safe 8.5%, we believe they should be bought and held over that timeframe.

PAA Operational Review

PAA is one of the largest midstream operators in the U.S. Its system provides transportation and logistical services of crude oil, natural gas, and natural gas liquids (NGLs) in the U.S. and Canada. Its transportation system is focused on crude oil, and to a lesser extent, NGLs. It also operates natural gas storage terminals. PAA’s operations are shown in the chart below.

Source: PAA 2019 10-K.

PAA’s general partner, Plains GP Holdings LP (PAGP), owns a non-economic controlling general partner interest. PAGP owns approximately 250 million units of PAA, amounting to 31.3% of PAA’s outstanding units. PAGP does not own incentive distribution rights in PAA, nor does it receive management fees from PAA, though it is reimbursed for the services it provides on PAA’s behalf.

PAA Unit Performance

PAA unitholders have had a rough ride over the past five

HFI Research's Dedicated MLP Service!

Piggybacking off of our successful main service, HFI Research, we are taking advantage of the current price disconnect in MLPs in relation to their fundamentals.

Our new service will include:

  • Subscribers to HFI Research MLP will receive 4-6 exclusive idea write-ups per month.
  • Real-time portfolio tracking including what to buy, when the dividend will be paid, tax implications, weighting, and much more.

As a launch special, we are giving everyone a 2-week free trial along with a 20% discount! Come and see for yourself what we are all about!

Sign-up here today!

This article was written by

HFIR Energy Income profile picture

HFIR Research is a full-time professional energy investor, active in the sector since 2015 while specializing in deep value opportunities and special situations. He has managed a private investment partnership since 2007 and has a long professional history in finance, having served in various roles in the industry since 2000.

He runs the investing group HFI Research Energy Income where he works to outperform the benchmark of the Alerian MLP Index, by investing in energy stocks for income and growth. Features of the service include: 4-6 exclusive idea write-ups per month, real-time portfolio tracking including what to buy, when the dividend will be paid, tax implications and positional weighting, fundamental data pertaining to MLPs, and 24/7 direct communication with the HFI Research team to ask questions. Learn more.

Analyst’s Disclosure: I am/we are long PAA. 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

Recommended For You

Comments (26)

Thanks, HFIR. long
Storied history of repeated cuts in distributions and subpar management decisions, not to mention being "crude-centric", all will cause units to tread water compared to other peers. Just too many disappointed investors from the past who have been badly burnt with this name, and that is bound to hold back a quick recovery in the unit price. The job is cut out for the management and only solid results going forward will bring newer investors in the fold.
CincinnatiRick profile picture
@nkvbradenton So, you say it's a buy. You are being paid to wait while that emotional fellow with the long memory, Mr. Market, takes his time getting over past trauma?
Yes, indeed. I have bought below $9 level. It has moved up with the sector and the energy names. It remains to be seen how the entity performs now that crude has found a higher trading range. Any positive mumblings when they come out with new presentation, and/or next earnings, will surely take this higher on heightened expectations. Not a lot of believers presently.
CincinnatiRick profile picture
@nkvbradenton Agreed. I picked up PAA last year out of the dumpster and now added $PAGP recently. Had some cash to deploy and it was the most attractive utilization...but not the bargain I got on the MLP last year. As long as the payouts keep coming, Mr. Market can take his sweet time.
The Permian is badly over-piped, even if production fully recovers to post-COVID. There is zero chance PAA ups its distribution any time soon. They need to pay down all the debt they can. Your focus should be contract roll-offs and the competitive environment for Permian takeaway.

That said, the current distribution is safe at this low and disappointing level.
M Plaut profile picture
It seems that it was not only the E&Ps that were spending in order to lose. It was great for PAA to be forced to cut back on spending and be forced to make some money.
Thanks for a well reasoned article.
Good write up. Hard to find great capital allocators in energy bro land. Have to go to Canada. They are on the road ahead of us shale as oil sands had to get religion after 2014, 5 years ahead of the energy bros.

Willie has been all over the map. Once PAA had gathering/transport competition and the diffs no longer were crazy PAA lost it's sizzle. But, if Permian oil keeps doing well, and why wouldn't it(?), PAA should do well. But you never know with Willie...

But, staying Permian and income focused, I think a VNOM gives better risk vs reward as long as WTI > $50. Not a huge Diamondback fan, but the minerals are going to kill it as a base case and you have embedded call option that the pipelines really do not have. Once VNOM gets debt under control I doubt FANG will be so aggressive on using VNOM as piggy bank, but you never know with Travis. SBR decent alternative. Or TRGP if want to stay in pipeline space. TRGP is a Permian NGL beast.

If you don't care about Permian focus then Canadian and BSM are A#1.
HFIR, can you tell me the title of your article that you wrote about the past 4 years in the energy sector and all the big events that occurred? I wanted to read it again and can't seem to find it. Thanks!
fourniersean profile picture
Sorry, PAA can purchase up to $500 MM. In November, 2020, they purchased 3.1 MM units and in December, another 3.1 MM units. According to the new 10K, they have $450MM left for repurchase as of 12/31/20.

So they are purchasing around $25MM per month.
fourniersean profile picture
Long and liking this stock. The company purchased about $500MM worth of units in November 2020, and again in December 2020. This reduced outstanding units by about 6 MM or almost 1%. (Back in 2016, there were "only" 400 MM units outstanding, so doubling the number of units is another reason PAA got clobbered.)
The share-buyback program is continuing into 2021, so we would expect another 1% reduction of shares so far this year. This is in addition to the 2% quarterly distribution.
Oil prices are increasing and the economy is recovering. Texas is open for business. What could possibly go wrong?
Given the fact that the CEO's compensation package allows him to be rewarded next year if the stock price increases, and given that shorts have been burned so far this year, I am liking PAA. (Willie also bought a bunch of units at 5.)
Excellent article pointing out the obvious poor management at PAA. Thesis is buy Plains because they will eventually make money inspite of themselves. I’m not so sure. Management has spent every penny they have made, why do you feel they will not do it again? Obviously they could care less about their investors.
jayridescarbon profile picture

@Jcraig304 Yes. They seem to believe div. cuts and reverse stock splits instill confidence in their “stakeholders”
Crazy but true.....Try ET
ras208 profile picture
Good article, I noticed they had pipelines into Canada do you think with the canceling of the Keystone pipeline they will pick up some business?
I own it, it’s my worst performer...even worse than ET. Fortunately I added enough at the bottom in calls and recently got out above $10 that my lifetime cost basis is down to around $12. That said, putting new money into EPD before I buy more of this at current levels. Think this name is dead money for rest of the year unless it just gets pushed up with the rising tide.
Steve Fischer profile picture
@Fred. L. Well you paid too much and are understandably bitterm but its like when you divorce your wife - others see something they like and enjoy her. Your timing was bad, this stock is looking good now,
@Steve Fischer

Well thanks for completely twisting what I just wrote. Yes I was too early, but I bought the heck out of it around $5 and still own a sizable position, there was no divorce. Just saying NEW money going into EPD first. Would love for it to perform right now, just predicting this is more of a 2022 story for larger upside.
Steve Fischer profile picture
@Fred. L. Glad you never got divorced! Stay married to PAA too.
Disagree with this article? Submit your own. To report a factual error in this article, . Your feedback matters to us!

About PAA

SymbolLast Price% Chg
Market Cap
Yield (TTM)
Rev Growth (YoY)
Short Interest
Prev. Close
Compare to Peers

More on PAA

Related Stocks

SymbolLast Price% Chg
To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.