Can Plains All American Pipeline LP Keep Growing Its Distribution?

Plains All American Pipeline has grown its distribution by 180% since 1998 -- can this trend continue?

Apr 28, 2014 at 11:59AM

For investors looking to buy into a master limited partnership (MLP) that can produce stable income and earnings growth for years, take a look at Plains All American Pipeline LP (NYSE:PAA). From 1998 to 2014, Plains All American Pipeline has grown its distribution by 180%, now yielding around 4.4% at today's prices. 

Some analysts question the stability of high MLP yields, but unitholders shouldn't fret. According to Plains All American Pipeline's management, "Using these essentially baseline-type forecasts, we are targeting 10% distribution growth for PAA in 2014, while maintaining a healthy distribution coverage of approximately 110%, which would result in approximately $140 million of cash retained in excess of distributions."

Even though Plains All American is increasing its distribution, it still has a very healthy coverage ratio of 1.1, which should allow unitholders to rest easy knowing that their income is secure. 

If you don't want to deal with the more complex tax structure of an MLP, you can still invest in Plains GP Holdings (NYSE:PAGP), which yields 2.5% and pays out a dividend instead of a distribution. 

Effectively, Plains GP Holdings makes money when Plains All American Pipelines makes money and distributes a certain percentage of it to Plains GP Holdings. While Plains GP Holdings sports a smaller yield, its yield is guided to increase by 25% this year.

So how do you grow the American way?
All this guidance sounds lovely, but unitholders and shareholders know better than to just blindly trust management. This is why you have to dig deep and see how Plains GP Holdings and Plains All American Pipeline plan to grow.

Part of the plan is to keep moving toward more fee-based revenue, so Plains All American can deliver consistent distributable cash flow regardless of energy price fluctuations. Currently, roughly 75% of Plains All American's revenue is fee-based. To get that to a higher level, Plains All American is shifting its focus toward fee-based projects like pipelines.

Working together
One pipeline that has plenty to offer is the Eagle Ford Joint Venture pipeline, which is a 50/50 partnership between Plains All American and Enterprise Products Partners (NYSE:EPD). By spending $120 million, the joint venture plans on increasing the capacity of the pipeline by 120,000 bpd. On top of that, the joint venture will build an additional 2.3 million barrels of storage capacity to service the expansion. This project is expected to be completed and in service by the second quarter of 2015. 

This expansion won't be accretive to shareholder and unitholders until next year, but keep in mind that the Eagle Ford Joint Venture pipeline (which currently has the capacity to transport 350,000 bpd) came online at the end of September of last year. This means that year-over-year comparisons will still be very much in Plains All American's and Enterprise Products Partners' favor, especially when considering the stability of the fee-based structure. 

The justification for expanding the Eagle Ford JV pipeline comes from the need to transport the additional crude from the Permian Basin that the Cactus pipeline will bring. By spending $350 million, Plains All American hopes it can bring the Cactus pipeline, with a capacity of 200,000 bpd, online by the second quarter of 2015. In other words, when the Eagle Ford Joint Venture pipeline expansion is completed. The purpose of the Cactus pipeline is to transport crude from eastern Texas (Permian Basin) westward toward the refinery complexes. 

Foolish conclusion
While these new or improved pipelines won't come online until the second half of next year, management's guidance is still very promising. Part of Plains All American Pipeline's 2014 guidance is related to the additional cash flow from the Eagle Ford Joint Venture pipeline, which will also help it move its fee-based revenue closer to 80%.

There is more than that at play here, however. On a subjective note, as hydrocarbon production keeps increasing, Plains All American Pipeline's assets will probably be running near full capacity. This will maximize distributable cash flow from current assets. This isn't going to be the year of major distributable cash flow growth, but the fact that management still plans on boosting payouts while maintaining reasonable coverage ratios could be seen as a positive, especially leading into 2015. 

Next year will be the year of Plains All American Pipeline, and if you're willing to wait a year while sitting on a 4.4% yield then this may be an investment worth looking into. Beyond 2015, as North American hydrocarbon production continues to rise, so will demand for midstream services. This would allow Plains All American Pipelines and Enterprise Products Partners to raise the fees other energy companies pay to use their assets. On top of adding additional transportation and storage capacity and other benefits, this will definitely boost distributable cash flow and will help keep the growing distribution trend safe and strong.

Callum Turcan has no position in any stocks mentioned. The Motley Fool recommends Enterprise Products Partners L.P.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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