Oil and natural gas industry giant Plains All American Pipeline (PAA 0.35%) struggled mightily during the oil market downturn. Not only did the volumes flowing through its pipelines sink, but so did the cash flow it pulled in from its supply and logistics business. Because of that, and a weakening balance sheet, the company slashed its dividend payout twice in the past few years to get its finances back on solid ground.
That said, with the oil market beginning to heal, better days look to be ahead for the company. That's also evident from its recently announced plans for expansions, moves that will provide it with more cash flow in the coming years. This growth, when combined with Plains All American Pipeline's improving financial situation, suggest its still-lucrative 5.2%-yielding payout could be heading much higher in the future.
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Adding a bit more fuel to the fire
This past week, Plains All American Pipeline unveiled two more growth initiatives. First, it said that it had secured enough customer commitments to proceed with construction of its Cactus II Pipeline. The system, which will move up to 585,000 barrels of oil per day from the red-hot Permian Basin to Corpus Christi, Texas, should be operational by the third quarter of next year. The company plans to combine some existing pipelines with two new ones to complete the system.
In addition, Plains All American Pipeline entered a strategic relationship with Matador Resources' (MTDR +1.95%) majority-owned San Mateo Midstream. As part of the deal, Plains will help gather oil for Matador and other customers in New Mexico, and transport it out of the region to hubs in Oklahoma and along the Gulf Coast. Plains plans to construct an extension from one of its pipelines in the region to San Mateo's system. This agreement will help lower Matador's transportation expenses, giving it more cash flow that it can use to grow production faster, which will result in higher volumes flowing across Plains' systems.
Image source: Getty Images.
Pushing the metrics in the right direction
These are just the latest in a string of expansions Plains has under way. Last year, for example, the company expected to spend $1.05 billion on growth projects, investments that should finally reverse the four-year slide in the company's earnings in 2018. Meanwhile, the company had more than $700 million of expansion spending planned for this year, which will likely increase in light of those two most recent announcements. These expansions position Plains to grow earnings from an anticipated low point of $2.1 billion last year to as much as $3 billion in the coming years.
That rise in cash flow, along with some targeted non-core assets sales and other strategic moves, has the company on pace to reduce debt to $1.4 billion by early next year, which would push its leverage down to within its target range. Once Plains hits that point, it will be in the position to return significantly more cash flow to investors, with the potential for a big one-time payout boost in 2019 followed by steady increases as expansion projects like those secured this week start generating cash.
An already improving outlook now looks even better
After a challenging few years, Plains All American Pipeline is slowly turning things around. While it still has work to do, the company's financial metrics are on pace to improve dramatically in the coming year, which would put it in position to increase its already-attractive dividend payout by a significant amount in 2019. Meanwhile, with more growth projects coming down the pipeline, the company should have the additional fuel to expand its payout even further in the future.
