Is The Plains Sell-Off A Buying Opportunity?

Shareholders of Plains All American Pipeline LP PAAand Plains GP Holdings LP PAGP endured an ugly Q2 earnings report this week that drove MLP unit prices down 10.5 percent and 23.2 percent, respectively.

But is the performance and price weakness a buying opportunity or a sign of more bad things to come?

Here’s what Citi Research analyst Faisel Khan had to say.

Current Situation

One of the major reasons for the plunge in unit prices was Plains management’s revelation that they may choose not to grow distributions until at least 2017 in an attempt to get distribution coverage back to 1.1x. In addition, negative comments about midstream overcapacity only added to the negative sentiment surrounding the industry, and Khan believes that things could possibly even get worse before they get better.

Outlook

Despite the short-term negative outlook, Khan believes that U.S. oil production in the lower 48 states will continue to grow in the long-term driven by strength in the Permian Basin. He predicts that Plains will be able to achieve its targeted 1.1x coverage in 2017, which will allow Plains All American to grow distributions at a 3.0 percent rate through 2019 and Plains GP to grow dividends by 10 percent from 2016 to 2019.

Upgrade

Khan sees the price plunge as a buying opportunity for investors and upgrades Plains GP from Neutral to Buy. “We estimate the sector is pricing in little to no growth into 2016, which we believe is overly pessimistic,” he explains.

Citi also has a Buy rating on Plains All American.