Plains All American Pipeline, L.P. (NYSE: PAA) continued its turnaround in the second quarter as recently completed expansion projects helped drive earnings higher. While its financial results weren't quite as impressive as they were in the first quarter due to the impact of seasonality and asset sales, it still was a noticeable step forward for a company that has had its share of challenges in recent years.
However, with more expansion projects on the way and the oil market improving, even better days appear to lie ahead for this oil pipeline giant and its majority owner, Plains GP Holdings (NYSE: PAGP) .
Drilling down into the numbers
|Metric||Q2 2018||Q2 2017||Year-Over-Year Change|
|Earnings before interest, taxes, depreciation, and amortization (EBITDA)||$506 million||$451 million||12%|
|Distributable cash flow (DCF)||$268 million||$290 million||(7.6%)|
|DCF per unit||$0.37||$0.40||(8%)|
Data source: Plains All American Pipeline.
Plains' second-quarter results might be a bit confusing at first glance since earnings jumped double digits while case flow slipped. However, that difference is easy to reconcile. Last October, Plains completed a public offering of preferred units -- raising nearly $800 million in cash to pay down debt and fund expansion projects -- and now needs to pay these preferred investors a distribution out of its cash flow. If we adjust for the impact of this payout, DCF would have risen nearly 14% year over year.
Driving the increase in both earnings and cash flow was the company's transportation segment:
Earnings in the transportation segment jumped 21% versus last year's challenging second quarter due to increased volumes on its Permian Basin systems, as well as contributions from its joint venture in the Eagle Ford Shale. The company also benefited from the impact of the Diamond Pipeline that it placed into service toward the end of last year. Partially offsetting these new additions were the sale of some assets in the Rocky Mountain and Central regions, without which earnings would have increased 27% year over year.
Earnings in the company's facilities segment declined, primarily due to the impact of asset sales. If we adjust for this impact, profitability would have increased 3% thanks to capacity expansions and higher volumes at its Cushing terminal, which is a major U.S. oil hub in Oklahoma.
Finally, the net loss in Plains' supply and logistics segment narrowed a bit due to improving natural gas liquids margins.
"We are pleased to report solid second-quarter results," stated COO Willie Chiang in the company's earnings release. Because of those solid results, the company "increased its guidance for the full year." Further, Chiang said, "we remain on track to achieve our deleveraging objectives and targeted credit metrics within the first half of 2019, while maintaining substantial distribution coverage underpinned by fee-based cash flow."
A look at what's ahead
As Chiang noted, Plains' solid showing through the first half enabled it to boost its 2018 forecast. The company now expects adjusted EBITDA of around $2.4 billion (up from $2.3 billion), which would be 15% higher than in 2017. Meanwhile, the company anticipates that DCF will be roughly $1.555 billion (up from $1.475 billion), which is 19% above 2017's level even after factoring in the preferred distributions. That's enough cash to cover the company's 4.8%-yielding payout by a very comfortable 1.79 times.
Plains also noted that it plans to raise its 2018-2019 capital spending program by $650 million, boosting its planned investment level to $2.6 billion. According to comments by Chiang in the accompanying conference call: "[This increase is] primarily due to strong demand for additional Permian infrastructure. The majority of the incremental capital represents a combination of several dozen small to medium sized Permian-related projects that are expected to provide us attractive economic returns."
These and other projects already underway put Plains on pace to increase EBITDA by another 14% to 15% in 2019.
At the same time, Plains is making excellent progress on its expansion strategy and is also working on a deleveraging plan, which remains on target. CFO Al Swanson noted on the conference call that "since the announcement of our deleveraging plan in August of last year, we have reduced debt by more than $1.2 billion and reduced the leverage metrics" from 5.5 times debt-to-EBITDA to 4.5 times, putting the company closer to its 3.5-4.0 times target that it expects to achieve early next year.
Another step forward
Plains All American Pipelines continues to make solid progress on its turnaround plan. Because of that, it's able to invest in much needed expansion projects in the Permian Basin that will drive accelerated growth, while at the same time improving its balance sheet. These efforts potentially set up the company to begin increasing its already high-yielding distribution next year, which would fuel distribution growth for Plains GP Holding's investors, as well.
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