Plains All American Pipeline: potential return above 10% (NASDAQ: PAA)

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JamesBrey

Introduction

Entering 2022, a new era of distribution growth has begun for Plains All American Pipeline (NASDAQ:PAA), as my previous article pointed out. Luckily, they didn’t disappoint with a steep 21% increase soon to follow. after publication, which helped create their high payout yield of 8.17%. While already desirable, it looks like unitholders like me can now brace themselves for a very high return of over 10% on current cost with further increases almost certainly on the horizon.

Executive summary and ratings

Since many readers are likely short on time, the table below provides a very brief summary and ratings for the main criteria assessed. This google doc provides a list of all my equivalent ratings as well as more information about my rating system. The following section provides a detailed analysis for readers wishing to delve deeper into their situation.

Plains All American Pipeline Ratings

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*Instead of simply assessing distribution coverage through distributable cash flow, I prefer to use free cash flow as it provides the strictest criteria and also best captures the true impact on their financial position.

Detailed analysis

Plains All American Pipeline Cash Flow

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Even though the outlook heading into 2022 was less than stellar with a mostly flat outlook to 2021, their cash performance in the first half of the year was actually solid. As a result, their operating cash flow increased to $1.132 billion and thus 10.33% more year-over-year compared to their previous result of $1.026 billion in the first half of 2021. Certainly , that drops to just 4.27% more year-over-year. if they removed their temporary working capital movements with their underlying results reaching $1.1 billion and $1.055 billion for the first halves of 2022 and 2021 respectively. After this strong start to the year, they have slightly increased their forecast for the rest of 2022, as shown in the slide below.

Plains All American Pipeline Guidance for 2022

Plains All American Pipeline Second Quarter 2022 Results Presentation

It can be seen that their 2022 forecast now sees an adjusted EBITDA of $2.375 billion, which is a 4.40% increase from their previous update of $2.275 billion in May and builds more on their initial forecast of $2.2 billion at the start of the year, according to my previously linked article. This now represents a total expected increase of 8.15% from their $2.196 billion result for 2021 and thus indicates that the second half of 2022 should be at least about as good as the first half, if not slightly better. Their latest forecast also points to $200 million in disposals, most of which is expected to fall in the second half as the first only saw $57 million and therefore implies that $143 million is expected to be seen in the second half. . Even without a stronger cash flow performance, they still generate sufficient free cash flow which landed at $719 million in the first half of 2022 and thus provided a very strong 256.79% coverage to their payouts. payout of $280 million and so unsurprisingly, this sees higher payouts on the horizon, per the management commentary included below.

“…the real issue on capital allocation is the split between increased distribution and redemptions. And I think you will see that we will continue to support increased distribution.”

– Plains All American Q2 2022 conference call.

Besides the very clear signal of higher returns for unitholders, it is also very positive to see that they plan to favor higher distributions rather than unit redemptions. While the latter isn’t necessarily a bad choice, I think the former is best suited to very mature industries, especially when they face a long-term challenge as the world transitions to clean energy. It obviously remains to be seen how much they will increase their distributions, although given their very high coverage of over 200% they have ample free cash flow and so a large double digit increase is certainly realistic, especially given the priority of their close 21% increase earlier in 2022.

Plains All American Pipeline Capital Structure

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Thanks to their strong free cash flow in the first half of 2022, their net debt fell $422 million or 4.81% to $8.349 billion from where it ended in 2021 at $8.771 billion. Looking to the second half of 2022, their free cash flow should lead to another similar improvement on its own, bringing their net debt below $8 billion for the first time in many years. While this may be partially affected if their $230 million lawsuit settlement is paid before the end of the year, this should be mostly offset by their divestments, as their forecast involves approximately an additional $143 million concurrently.

Plains All American Pipeline Leverage Ratios

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Thanks to their lower net debt, their leverage also saw improvement with their respective net debt to EBITDA and net debt to operating cash flow down to 3.13 and 3.80 from their previous results of 3 .52 and 4.39 at the end of 2021 This now sees the former moving out of the high territory and dropping into the moderate territory between 2.01 and 3.50, while the latter is approaching this point.

Looking at their leverage ratio as used by management, it also saw a comparable decrease to 4.10 from 4.50 at those same points in time, according to slide eleven of their Presentation of second quarter 2022 results. As this same slide also shows, they have now achieved their debt target of between 3.75 and 4.25, with further improvements expected as their net debt declines, as commented by management below. In addition to obviously increasing their fiscal resilience, meeting their target also incentivizes management to continue with higher distributions.

“As a result, we now expect to reach the midpoint of our 4.0x leverage target range by year-end 2022.”

– Plains All American Q2 2022 Conference Call (previously linked).

Plains All US Pipeline Liquidity Ratios

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Turning elsewhere to their liquidity, it had a relatively quiet period in the first half of 2022 with their respective current and cash ratios barely changing at 0.97 and 0.04 from their previous respective results of 0, 98 and 0.07 at the end of 2021. During this time, they also paid off their $750 million in debt maturities that were due in 2022, while only committing $115 million in new intangible debt in under their commercial paper program. As they did not touch their credit facility or their inventory facility during the first half of 2022, they should maintain their respective cash of $1.296 billion and $1.306 billion, which will help smooth their next debt maturities during 2023 and beyond, as the table below. attach.

Plains All U.S. Pipeline Debt Maturities

Plains All American Pipeline 2021 10-K

Conclusion

It remains uncertain whether unitholders will be lucky enough to receive higher distributions later in 2022 or whether they will wait until early 2023, a year after their last increase. Either way, given very supportive management feedback, strong free cash flow and debt target now met, it seems almost certain that higher payouts are to come. Given that this could very easily see their high 8%+ payout yield turn into a very high 10%+ yield on current cost, I think upgrading to a solid buy rating is now appropriate.

Notes: Unless otherwise noted, all figures in this article are taken from Plains All American Pipeline’s SEC Filingsall calculated figures were performed by the author.

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