An Oil MLP Set to Grow in Any Scenario

The BridgeTex Pipeline being built outside of Brownwood, TX.

The shale oil revolution is in full swing as we speak. Producers are drilling all over several shales, increasing production and thereby displacing waterborne crude imports at a rapid clip. Some are now begging the question of what will happen when there are no more imports to displace, as there exists a congressional ban on crude oil exports. Before you roll your eyes at the prospect of America producing more oil than it consumes, understand that there are several grades of crude oil and that the U.S. is indeed approaching an impasse in regards to crude of the light, sweet variety. The chart below sheds better light on the situation.

Courtesy of Plains All American Investor Relations

By 2018, the U.S. will have an 'imbalance' of 900,000 barrels of condensate and light, sweet crude oil. This estimate includes predictions of refinery capacity additions and assumes flat crude oil demand in the U.S., which has indeed been the demand paradigm since 2008. 

So, where's all that extra light, sweet crude going to go? We don't know. Congress may lift the export ban. If so, prices may stay constructive. However, producers will likely react to much lower prices by pulling back production. In any case, with an excess of light, sweet crude on the horizon, the shale oil production picture could get a lot rockier over the next few years. Wouldn't it be great to have a business that could grow in either scenario?

Enter Plains All American Pipeline  (NYSE: PAA  ) . Plains is a pipeline focused mostly on the transportation of domestically produced crude oil from wellhead to refinery. By contrast, some of the bigger pipelines have less concentration. Kinder Morgan Energy Partners (NYSE: KMP  ) , for example, does not get a majority of revenue from any single business unit. 

The most important geography for Plains All American is the Permian Basin, where the BridgeTex pipeline moves Permian crude to the Gulf Coast. 

As an operator of pipelines which are in very limited supply in the face of growing crude production, Plains does benefit from oversupply situations. If supplies drop, pipelines, which are the most cost-efficient means by which to transport crude, will likely still run at full capacity, as pipeline space is so limited. 

Source: Plains All American Pipeline

Option A, Option B
Last year Plains grew distributable cash flow, or DCF, by just over 10%. The partnership should be able to continue this trend whether domestic oil prices stay 'constructive' or plummet due to excess capacity. 

For example, if prices stay around where they are now, Plains will continue to build out its pipeline infrastructure thanks to continued high demand. DCF growth will continue to be linear. This scenario is likely if congress lifts the export ban and if the global market is healthy enough to absorb the excess capacity. 

If, however, we do see 900,000 excess barrels of light sweet crude and condensate on the market, and the result is a steep drop in oil prices, Plains will be ideally positioned for different reasons. Consider this: Price differentials between domestic and global oil will widen. This is usually a bullish sign for pipelines. There will, in the short term at least, be far more supply needing to go through pipelines than there will be pipeline space available. Plains will not build new pipelines but will be able to use its strong balance sheet to acquire.

Bottom line
Plains All American is an oil pipeline that will prosper, rain or shine. At over 1.1 times DCF coverage in 2013, Plains' coverage ratio is better than most pipeline partnerships, including heavyweight Kinder Morgan Energy Partners. Plains is in a unique position to benefit from volatility. 

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