Last year was one that investors in Plains All American Pipeline (NYSE:PAA) would likely want to forget. Continued challenging market conditions forced the oil pipeline company to water down its guidance early in the year, which sent its units tumbling. Things only got worse when the company slashed its distribution for the second time in two years. These factors combined to drive Plains down more than 36% last year. That sell-off took Plains' majority owner, Plains GP Holdings (NYSE:PAGP), down as well, with it plunging nearly 37% last year.
While the struggles of Plains All American Pipeline continued in the fourth quarter, it expects to turn things around in 2018. That suggests its distribution, currently yielding 5.8%, is on solid ground and could be heading higher in the coming years, implying the same for Plains GP Holdings.
Drilling down into the results
Plains All American Pipeline's fourth-quarter results were a bit mixed. Overall, the company generated $419 million in distributable cash flow (DCF) during the quarter, which pushed its full-year total to $1.31 billion. That was slightly under its guidance for DCF of $1.33 billion for the year. However, the company did deliver solid results in two of its three segments:
As the chart shows, transportation revenue rose sharply, up 27% year over year, fueled by increasing volumes on its Permian Basin systems and additional contributions from its Eagle Ford joint venture. Meanwhile, the company's facilities segment delivered an 8% improvement in earnings, driven by increased natural gas liquids (NGL) storage and fractionation services, or the splitting of raw NGLs into propane and ethane. The lone laggard was the company's supply and logistics business, which continues to be plagued by weaker margins. Both transportation and facilities delivered earnings above expectations for the year, but the poor finish by supply and logistics pushed the company's full-year results below guidance.
The company completed several strategic initiatives during the quarter. After closing $1.1 billion of asset sales for the year, Plains used the proceeds, along with excess cash flow, to reduce debt by $1.5 billion in the quarter. It also completed construction of several expansion projects and secured a few more to fuel future growth.
A look at what's ahead
"We are pleased to report that PAA finished the year on a strong note, having made significant progress on [our] plans," said COO Willie Chiang. He further noted:
We remain on track to achieve our deleveraging objectives and targeted credit metrics by early 2019 while maintaining substantial distribution coverage underpinned by predominantly fee-based cash flow. Additionally, execution of our capital program, which includes several recently announced Permian projects, and robust Permian fundamentals will drive momentum for PAA's continued growth in 2018 and beyond.
These expectations are reflected in the company's guidance for 2018. Plains stated that it expects to generate $1.475 billion, or $1.99 per share, of DCF this year. That's about 13% more than last year's showing and would cover its current payout by a factor of 1.7.
The main driver of that growth will be Plains' transportation segment, where the company expects earnings to jump nearly 20% due to recently completed expansion projects. One of them is the Diamond Pipeline, which Plains and partner Valero Energy (NYSE:VLO) started up in November. The pipeline will supply Valero's Memphis refinery with cheaper oil, which will boost its earnings while providing Plains with a steady stream of fee-based cash flow.
Plains has several more fee-based expansion projects slated to enter service and ramp up in the coming year, which gives it increasing confidence that cash flow will steadily rise from here. The company plans on using that excess cash to continue paying down debt this year, which puts it on pace to meet its leverage target early next year. At that point, the company could begin returning more cash to investors by boosting its payout.
A cheap income stream
Plains All American Pipeline has gotten clobbered in recent years due to the challenges in the oil market. However, with its turnaround plan starting to bear fruit, income seekers can get this beaten-down pipeline stock for an excellent price of around 10 times cash flow, well below the more than 12 times cash flow of most peers. While it could be a while before the market awards the company with a higher valuation, patient investors -- including those who own it through Plains GP Holdings -- would get paid well while they wait.