This High-Yield Oil Pipeline Stock Overcame Hurricane Harvey however Still Watered Down Its Guidance — The Motley Fool

Plains All American Pipeline (NYSE:PAA) reported one other blended quarter. While the oil pipeline firm’s earnings rose and had been barely forward of expectations regardless of a slight affect from Hurricane Harvey, the MLP lowered its full-year steering for distributable money circulate. That stated, after lately slashing its payout, it’s going to generate greater than sufficient money to pay that decrease fee with a lot left over for its debt discount plan, which is sweet information for its buyers in addition to these in its majority proprietor Plains GP Holdings (NYSE:PAGP).

Drilling down into the numbers

Plains All American Pipeline reported $489 million in adjusted EBITDA, which was 6% increased than final yr’s third quarter. Meanwhile, distributable money circulate rose 2% to $299 million, with the decrease progress fee as a result of a rise in curiosity and upkeep bills. As the next chart exhibits, two of its three segments improved versus the prior yr:

A chart showing Plains All American Pipeline's earnings by segment in the third quarter of 2017 and 2016.

Data supply: Plains All American Pipeline. Chart by creator. In hundreds of thousands of .

The transportation phase led the way in which, with adjusted EBITDA leaping 18% from final yr’s third quarter. The major driver was a rise in volumes flowing via the corporate’s Permian Basin programs, which incorporates the Alpha Crude Connector it purchased from Concho Resources (NYSE:CXO) earlier this yr. Volumes on that system have been on the rise, due partly to Concho’s speedy progress fee this yr, with its oil output up 31% yr over yr and 6% increased than the second quarter. These rising volumes from Concho and others have enabled Plains to earn increased volume-based charges.

Meanwhile, earnings in Plains’ services phase rose 6% yr over yr. The major driver was increased fee-based income from among the firm’s pure gasoline liquids (NGL) services. That helped offset decrease actives at its rail services in addition to the affect from an badet sale it accomplished earlier this yr.

Partially muting the expansion from these two segments is the continued weak point within the firm’s provide and logistics enterprise. While the seasonality of its NGL provide enterprise performed a task, adjusted EBITDA declined $39 million yr over yr due to “continued competitive pressures” that compressed margins.

In addition to the persistent headwinds impacting provide and logistics, Plains famous that downtime as a result of Hurricane Harvey brought about fewer volumes to circulate via a few of its programs throughout the quarter. That resulted in a few $6 million hit to adjusted EBITDA throughout the quarter. However, regardless of that affect, CEO Greg Armstrong famous that “PAA reported third-quarter results that were slightly above guidance.”

An oil pipeline in a green field.

Image supply: Getty Images.

A have a look at what’s forward

However, though third-quarter outcomes got here in above the corporate’s expectations,  it watered down its full-year steering as soon as once more:

Metric

Current Guidance

Guidance Last Quarter

Initial Guidance

Transportation EBITDA

$1.275 billion

$1.295 billion

$1.315 billion

Facilities EBITDA

$725 million

$705 million

$680 million

Supply and logistics EBITDA

$75 million

$75 million

$365 million

Distributable money circulate

$1.33 billion

$1.37 billion

$1.6 billion

Data supply: Plains All American Pipeline.

Overall, there was no change to adjusted EBITDA steering, which remained on the $2.zero75 billion it estimated final quarter as increased services earnings ought to offset weaker transportation earnings. What modified was distributable money circulate steering, which the corporate lowered by $40 million. Driving the lower is a rise in deliberate upkeep spending and earnings taxes. That pushed the corporate’s steering additional under its preliminary expectations, due primarily to far more difficult market circumstances for its provide and logistics companies.

While 2017 has confirmed to be harder than Plains initially anticipated, the corporate sees higher days forward. That’s as a result of it has a number of progress tasks beneath development, which it presently estimates might drive adjusted EBITDA up greater than 20% subsequent yr whereas fueling a greater than 35% surge in distributable money circulate.

Further, the corporate continues making progress on its debt discount plan, which might see it pay down $1.four billion in borrowings by early 2019 and push leverage from four.7 occasions debt to EBITDA all the way down to its goal vary of three.5 to four.zero occasions. At that time, Plains can be within the place the place it may well begin returning more money to buyers, possible by rising its distribution, which presently yields 5.eight%. Those future will increase would additionally circulate all the way down to Plains GP Holdings, enabling it to spice up its 5.6% payout.

Waiting for the plan to work

Plains All American Pipeline has been strategically repositioning to scale back its publicity to the volatility of its provide and logistics enterprise by investing to increase its fee-based transportation and services segments. That plan is beginning to bear fruit, provided that the corporate grew earnings within the third quarter. However, the mbadive payoff might be extra evident over the subsequent yr and a half, when the majority of its progress tasks ought to enter service, which might place Plains to ship regular distribution progress in 2019 and past.


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