Over the last year or so, Plains All American Pipeline — a large, crude oil-focused master limited partnership (MLP) — has twice made significant changes to its corporate structure and distribution process to free capital to fund organic growth, reduce debt, and strengthen distribution coverage. The changes are efforts to fix a problem: As oil prices plunged, PAA’s distribution coverage fell below 100% in 2015 and 2016, forcing the company to add debt and issue equity to raise cash. An initial restructuring that Plains undertook in mid-2016 included eliminating the incentive distribution rights (IDRs) payable to its general partner — the IDRs had been draining $620 million per year. (For more on IDRs, see Changing Horses in Midstream.) The change resulted in a 21% reduction in the distribution to limited partners as PAA set a minimum annual distribution coverage target of 115%. But plunging profits from the company’s Supply & Logistics segment eroded its coverage to 99% in 2017, triggering another comprehensive review of how it calculates its distribution. In late August, Plains announced a 45% reduction in the annual distribution, from $2.20 per unit to $1.20 per unit, and said it would base future distributions only on the results from its fee-based Transportation and Facilities segments. Today we preview our new Spotlight Report on Plains, which provides a detailed analysis of the likely future performance of all three segments of this major midstream MLP.
Spotlight is a joint venture of RBN Energy and East Daley Capital Advisors. With the support of Oil & Gas Financial Analytics, Spotlight provides deep dives into the fundamentals that shape the outlook for midstream energy companies. Spotlight should not be viewed as investment advice. Spotlight is included as part of our Drill Down Report series, which is available to RBN Backstage Pass members. For more about Spotlight, see the paragraph at the end of this blog.
Plains All American Pipeline (NYSE: PAA) is a $15 billion market cap, master limited partnership (MLP) that owns and operates midstream crude oil, natural gas liquids (NGL), natural gas, and refined products infrastructure and provides logistics services. Founded in 1989 as the midstream subsidiary of an exploration and production (E&P) company, Plains Resources, PAA was spun off as a publicly traded MLP in 1998 and fully separated from the E&P in 2001. In 2016, the company generated $2.2 billion in earnings before interest, taxes, depreciation and amortization (EBITDA) from its three business segments:
- The Transportation segment assets include approximately 20,000 miles of crude oil and NGL pipelines and gathering systems with an average throughput of 4.6 MMb/d in 2016, 31 MMbbl of above-ground tank storage capacity, 810 trailers, and 120 transport and storage barges and 60 transport tugs.
- The Facilities segment has about 75 MMbbl of crude and refined products storage capacity, 32 MMbbl of NGL storage capacity and 97 Bcf of natural gas storage capacity. It also owns nine natural gas processing plants in Canada and along the U.S. Gulf Coast, a 120-Mb/d condensate processing facility in the Eagle Ford Shale, eight fractionation plants in the U.S. and Canada, 34 crude oil and rail terminals, and six marine facilities.
- The Supply & Logistics (S&L) segment purchases, stores, transports and markets crude oil, NGLs, and natural gas to support the company’s Transportation and Facilities segments.