We have downgraded our recommendation on
Plains All American Pipeline L.P.
) to Neutral from Outperform. This revision was primarily due to
decline in hydrocarbon volumes, uncertainty in global capital and
credit markets, stringent regulations and higher expenses
associated with offshore drilling, and commodity price volatility.
We know that Plains All's cash inflow primarily depends on
transportation of hydrocarbon through its infrastructure. A decline
in hydrocarbon volumes due to lesser demand, stringent
environmental and other regulations related to hydrocarbon
transportation, and natural calamity may cause the partnership's
cash flow to decline in the future.
Secondly, Plains All generates a major part of its revenue from
low-risk fee-based activities. However, the partnership may be
exposed to commodity risk within its Supply and Logistics segment,
which is involved in the purchase of crude oil through third-party
tankers. Though the partnership re-sells the oil and locks in
profit margins, this act involves payment of collateral for hedges
based on the market price of crude. Therefore, volatility in crude
oil pricing and market structures may negatively impact Plains
All's volumes and margins in its logistics and marketing
On a positive note, Plains All American Pipeline's portfolio of
crude oil pipeline and storage assets are strategically located in
well-established oil producing regions that serve major U.S.
refinery and distribution markets. We know that the partnership's
crude oil gathering and transportation activities are expected to
predominantly generate fee-based revenue, resulting in stable and
low-risk earnings and cash flows.
In addition, Plains All continues to increase its internal
operational efficiencies along with steady investments in
infrastructural development activities. In the first half of 2012,
the partnership's capital expenditure was $2.2 billion. Under the
organic growth program, Plains All is expanding its crude oil rail
facilities, increasing its gathering system; constructing a new
condensate stabilization facility; and building a new pipeline
beside the Gulf Coast.
On the flip side, Plains All has adequate operating gas storage
facilities, which will enable it to meet its contractual
obligations with respect to wheeling, injection, withdrawal and gas
specifications. If the partnership is unsuccessful in performing
its plans or fails to wheel, inject or withdraw natural gas at
contracted rates, or unable to meet contractual quality
requirements, it may incur high costs to satisfy its contractual
Houston, Texas-based Plains All American Pipeline, L.P. owns assets
strategically located in well-established oil producing regions,
catering to major U.S. refinery and distribution markets. The
partnership competes with
Enterprise Products Partners L.P.
). Plains All American Pipeline, L.P currently has a short-term
Zacks #3 Rank (Hold rating).
ENTERPRISE PROD (EPD): Free Stock Analysis
PLAINS ALL AMER (PAA): Free Stock Analysis
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