What happened
Midstream MLP Plains All American Pipeline (PAA -1.35%) and its general partner, Plains GP Holdings (PAGP -1.49%), both plunged on Tuesday morning and were down 16% and 15%, respectively, at 12:15 p.m. EDT. Driving the sell-off was Plains All American Pipeline's lackluster second-quarter report.
So what
The oil pipeline company reported adjusted EBITDA of $451 million, which was down 12% from last quarter and 5% year over year, due to pressure on margins from its oil and natural gas liquids marketing activities. While that was in line with its prior guidance, the company now expects its full-year results to come in below those expectations. That led it to reduce its full-year adjusted EBITDA guidance from $2.26 billion to $2.08 billion.
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The company noted that it is reviewing several initiatives that could improve its full-year outlook, including cutting its distribution. While the company initially thought that it could fully cover its payout at current levels this year, it now projects a shortfall, which may lead it to cut the payout from $2.20 per unit to $1.80 per unit. That would likely result in a distribution cut at Plains GP Holdings, too, since its only assets are the units it holds of Plains All American Pipelines. Reducing the payout would be another blow to the company's credibility, given that it already cut its payout last year to what it thought at the time was a sustainable level. Further, the current payout level appeared to be growing safer given the company's most recent strategic initiatives, which had it on pace to grow adjusted EBITDA by more than 30% in the coming years.
The revised outlook didn't sit well with analysts at Baird, which downgraded the stock from outperform to neutral, citing issues in its supply and logistic business that could weigh on 2018's results as well. Further, Baird stated that the company's management team had "exhausted its credibility," and suggested that they need to be more open with investors and increase their disclosures in order to restore confidence.
Now what
Plains All American Pipeline finally appeared to have been heading in the right direction after completing a slew of strategic initiatives over the past year that bolstered its financial situation and growth prospects. Unfortunately, the company doesn't seem to have done enough to address its issues, which put it at risk of another distribution cut. That's not what income investors want to see from companies like Plains, which is why today's share price drop might not be a buying opportunity -- there could be more bad news to come.
