The past couple of years have been challenging for oil pipeline MLP Plains All American Pipeline (NASDAQ:PAA). Lower oil prices cut deeply into the company's earnings and cash flow, putting pressure on its balance sheet. However, the company has undertaken several strategic initiatives in recent quarters to overcome those issues, which finally started paying dividends in the first quarter.

Drilling down into the results

Plains All American Pipeline built on its solid showing in the fourth quarter of 2017 to put together an even better performance in the first quarter of 2018, especially versus the same period last year:


Q1 2018

Q1 2017

Year-Over-Year Change

Earnings before interest, taxes, depreciation, and amortization (EBITDA)

$593 million

$512 million


Distributable cash flow (DCF)

$443 million

$302 million


DCF per unit




Data source: Plains All American Pipeline.

Fueling that growth was the company's transportation segment, as well as a rebound from its supply and logistics business, which was a trouble spot last year:

A chart showing Plains' earnings by segment in the first quarter of 2018 and 2017.

Data source: Plains All American Pipeline. Chart by the author.

Earnings in the transportation segment leaped 23% year over year. These were driven by higher volumes on the company's Permian Basin systems, as well as increased contributions from its Eagle Ford joint venture thanks to higher volumes from improved oil prices, acquisitions, and expansion projects. The company also benefited from placing the Diamond pipeline into service late last year. These positive contributions more than offset the impact of several non-core assets sales that were part of the company's strategic plan to reduce debt. Without those sales, earnings from the transportation segment would have increased 26% versus the previous year.

Earnings in the supply and logistics segment rocketed 41% year over year due to higher margins. The company's activities in this segment have benefited from the rise in crude prices over the past year.

The lone laggard this quarter was the facilities segment, where earnings dipped 2% year over year, due entirely to asset sales. After adjusting for those divestitures, earnings would have increased 5% year over year thanks to higher revenue from its Canadian gas processing operations, as well as increased activities at some of its terminals.

A pipeline coming from an oil pump.

Image source: Getty Images.

A look at what lies ahead

Overall, Plains' first-quarter financial results came in slightly ahead of its expectations. Because of that, the company remains on pace to meet its full-year guidance to produce $2.3 billion of adjusted EBITDA and $1.475 billion of DCF, which would be 10.5% and 12.9% higher, respectively, than 2017's results. That's enough cash flow to cover the company's 4.9%-yielding payout by a comfortable 1.7 times, leaving it with excess to continue paying down debt and finance expansion projects.

Plains "continue[s] to make progress toward the execution of our strategic plans," according to COO Willie Chiang. He also noted that the company "remain[s] 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." Plains has already reduced its leverage ratio from an elevated 5.5 times in the year-ago quarter to 4.5 times in the first quarter, as it works its way to get that number to between 3.5 and 4 by early next year. Once the company achieves that goal, it could restart distribution growth, providing a further boost to what's already a high yield.

Plains All American Pipeline currently expects to invest $1.4 billion on expansion projects this year, which will grow earnings in 2018 and beyond. However, with oil prices running higher than expected, it's working to accelerate some of next year's projects into 2018. Because of that, it could increase its budget so that it can bring those cash flows forward.

The start of good things to come

Plains' strong first-quarter results show that its turnaround plan is working. Not only has it been able to reduce debt, but it has also still managed to increase earnings by investing in high-return growth projects. With a large slate of expansions still underway, the company's future looks bright, especially now that the oil market is improving.

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