Plains All American: Storage Assets Provide Oil Downturn Benefits
- Mar 29, 2020
Plains All American (NYSE:PAA) is a more than $4 billion midstream company with a dividend yield of almost 25%. The company has seen its share price drop almost 70% since the start of the year as a result of the oil crash. However, despite this drop, the company has an impressive portfolio of assets, with the crash actually leading to major catalysts in its storage division.
Plains All American is one of the largest integrated U.S. energy producers.
Plains All American is one of the largest midstream companies, although it's worth noting its situation has changed significantly since the above image. The company's market capitalization is almost $4.5 billion as its dividend yield has pushed towards almost 25%. That's caused by the more than 50% decline in the share price recently.
However, some aspects of the company have stayed constant, which is important to pay attention to. PAA continues to move significant amounts of crude oil and natural gas, including major oil sands connections. Simultaneously, it has >100 million barrels of storage capacity, something we'll discuss later, that'll become a growing part of its portfolio.
One of the most impressive aspects of Plains All American's portfolio is its storage portfolio.
The company has four major terminals where oil comes into and exits. Cushing, OK, is one of the company's largest terminals with a massive 25 million barrels of storage. As the world worries about a storage crisis, rates for storage are increasing rapidly. Plains All American, with its 100 million barrels of storage, is seeing the rates on its storage go up significantly.
For example, in Cushing, OK, where Plains All American has 25% of its storage and is the largest operator, rates have more than doubled from $0.20/month/barrel to $0.50/month/ barrel. For reference, assuming the same rate increase occurs across the rest of Plains All American's storage, that's $360 million in additional annual revenue that the company will receive with nearly no increase in corresponding costs.
That could go straight to the company's and therefore after taxes shareholders' bottom line and it's an exciting part of the business during an oil crash.
Past the company's storage business, the company has growth potential through its other businesses.
The above image shows the company's capital spending. It is planning to keep 2020 capital spending roughly in line with 2019 capital spending at more than 30% of market capitalization. However, the company is working to reduce its capital spending - PAA announced yesterday it has postponed its Red Oak pipeline project.
However, despite this, the company is focused on projects that can provide synergies between its existing projects. By controlling the entire value chain from where oil sands are collected in Canada to where they are shipped from Houston, the company can make significant profits along the way. At the same time, it's also worth noting here that Plains All American doesn't have a massive capital program like some of its peers.
The company's capital program, at $1.4 billion annually, is manageable, and it has room to decrease growth capital spending and significantly increase cash flow.
Going forward, a big part of Plains All American's financial strength will also be derived from its fee-based capital.
The company has >97% fee-based 2020 estimated adjusted-EBITDA, more than nearly all of its peers except for firms like Williams Companies (NYSE:WMB), which have fee-based contracts with utilities. More importantly, it means that the company will continue to earn steady earnings during a downturn, with little variation. Even if that 3% non-fee-based earnings disappeared, the adjusted-EBITDA would be impressive.
At the same time, a significant portion of the growth capital spending which we discussed is also fee-based. Roughly 85% of the company's 2019 and 2020 capital spending is fee-based. That fee-based capital will support the financial situation.
Overall, the strong financials will generate significant shareholder rewards, supported by the fee-based capital.
Plains All American is aiming for a ~3.0x-3.5x leverage, significantly lower than most of its peers. For example, Kinder Morgan (NYSE:KMI) has a target leverage ratio that's almost 50% higher. The company is focused on a minimum annual distribution coverage of 130% - a strong distribution. It's also worth noting that this factors in the current 25% dividend yield.
Going forward, the company plans to utilize retained cash flow to fund growth, allowing it to eliminate common equity issuance. It is maintaining liquidity as well as funding this growth. In fact, based on the liquidity targets, the company believes it has ~$2.5 billion in extra liquidity.
As Plains All American focuses on ramping down its growth capital spending, and it's already planned to delay 2020 growth capital, the returns should increase significantly. The company has ~$8 billion in debt and its dividends are ~$1.1 billion. At the same time, the capital spending decline should save it ~$1 billion annually in 2022 vs. 2020.
That combined savings in capital spending, supported by the dividend coverage, should allow the company to easily manage its dividends. I expect the company will continue maintaining those dividends going forward.
However, with all of this said, Plains All American does have some risks worth paying attention to for investors. The two largest risks are continued capital obligations along with the risk of a volume decline.
The first risk is the company's continued capital spending. It is planning to continue investing heavily, with $1.4 billion in 2020 and $0.9 billion in 2021. The company has already started postponing capital spending; however, spending 30% of your market capitalization in 2020 on growth capital is significant. The returns from this need to be successful, or they can hurt shareholders.
The second is the risk of a volume decline hurting its fee-based earnings. In the immediate term, the fee-based cash flow is secure; however, the company runs the risk of volumes declining over the next several years as low prices cause lower production. That could make it harder for the company to renew contracts which could place a strong negative impact on its long-term cash flow.
Plains All American has an impressive portfolio of assets worth $29 billion supplying it with more than 97% fee-based cash flow. The company has had a difficult time as a result of the oil crash, and its shares brutally punished, pushing its dividend towards 25%. However, despite this decline, on top of fee-based cash flow, the storage assets could benefit from the decline in oil.
Going forward, the company's financial position is incredibly strong. Financial spending is declining, as a result of capital projects completing, and the company is pushing its capital spending later. At the same time, the company has a significant 1.3x dividend ratio and has shown no intention to cut its dividends. Going forward, I expect the shareholder returns to continue.
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Disclosure: I am/we are long PAA, KMI, WMB. 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.