What To Like And What To Be Concerned About When It Comes To Plains All American

Plains All American Pipeline, L.P. PAA, an owner and operator of midstream energy infrastructure and logistical services for the energy market, announced last Friday a plan to cut $1.4 billion of its debt, selling certain assets and reduce payments to its general partner as part of a turnaround initiative.

Stifel: The Positives And Negatives

Plains' Friday announcement contained a few surprises, including a reduction of the distribution by a larger amount than expected. However, those steps may be necessary to meaningfully reduce its debt profile and execute on its capital expansion plans, Stifel's Selman Akyol commented in a research report.

Management made it clear that its focus moving forward is on preserving the balance sheet and not the distributions, Akyol commented. Shareholders will, in fact, benefit over the long term from this decision, especially when considering the distribution coverage of 1.75x is still "robust" compared to its peers.

On the other hand, the supply and logistics support of Plains' fee-based assets is a concern.

"Our understanding is cash flows generated from Internal are supported by the current market structures, while Integrated Economics require S&L to lose money in support of PAA's fee-based activities," the analyst wrote (see his track record here). "The question being—what provides management confidence that Internal does not shift to Integrated Economics, further eroding cash flows?"

Akyol maintains a Hold rating on Plains' stock with a price target lowered from $26 to $21 as shares "are near a bottom," but now is not the time to upgrade the rating.

BMO Upgrades

BMO Capital Markets' Danilo Juvane upgraded Plains All American's stock rating from Market Perform to Outperform with a price target boosted from $22 to $25.

Plains' announcement provides not only a clear deleveraging path but also hints of the possibility of resumed dividend growth in 2019, at which point the company could hit its targeted leverage metric of 3.5–4.0x, Juvane stated in a research report (see his track record here).

Perhaps more importantly, Plains' game plan does not require the issuance of new equity for routine capex growth, the analyst continued. The company will make use of its retained cash flow and debt and can save any equity issuance for future major projects or strategic acquisitions.

"With the cat now out of the bag, we think PAA provides an attractive skew with downside to $19 vs. our target price of $25," the analyst concluded.

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The Market In 5 Minutes _______ Image Credit: "Natrona County Fire District and industry players Anadarko and Plains All American Pipeline deploy a boom to collect the simulated oil spill with a vacuum truck at Control Point #2 from the North Platte River during the simulated oil spill exercise." By USEPA Environmental-Protection-Agency (May 14, 2014 – Casper, WY) [Public domain], via Wikimedia Commons