Plains All American Pipelines' (PAA 1.68%) turnaround strategy continued paying dividends during the fourth quarter. The oil pipeline-focused MLP's financial results surged thanks to recently completed expansion projects, as well as its ability to capitalize on issues in the oil market, which enabled it to deliver earnings and cash flow well above its guidance. That strong showing has the company on track for continued success in 2019.
Drilling down into the numbers
|
Metric |
Q4 2018 |
Q4 2017 |
Year-Over-Year Change |
|---|---|---|---|
|
Earnings before interest, taxes, depreciation, and amortization (EBITDA) |
$949 million |
$631 million |
50.4% |
|
Distributable cash flow (DCF) |
$679 million |
$419 million |
62.1% |
|
DCF per unit |
$0.94 |
$0.58 |
62.1% |
Data source: Plains All American Pipeline.
Plains All American anticipated that it would have a strong quarter, which led it to boost its full-year guidance heading into the period to $2.55 billion in adjusted EBITDA and $1.68 billion of DCF. However, the company vastly exceeded those expectations after delivering a gusher of earnings during the fourth quarter, pushing full-year EBITDA up to $2.68 billion and DCF to $1.79 billion. The main factor driving the outperformance was the company's supply and logistics business:
Data source: Plains All American Pipelines. Chart by author.
Plains All American was able to take advantage of the wide difference between regional oil prices in the U.S. and Canada during the quarter to generate a gusher of profits from its supply and logistics business, which helps customers get crude and natural gas liquids (NGLs) to higher-valued markets. That business, which is highly susceptible to changes in oil prices, enjoyed more favorable market conditions last year, enabling Plains All American to generate $400 million of additional profit compared with 2017.
The company's transportation business was also strong during the quarter, as earnings jumped 20%. Driving that growth was increased volumes from its Permian Basin systems, thanks in part to the start-up of the Sunrise II pipeline last quarter, as well as a full quarter from the Diamond pipeline that began service in late 2017. Those new additions helped more than offset the lost income from asset sales, including an interest in the BridgeTex Pipeline and assets in the Rocky Mountain region. Without those sales, earnings in Plains All American's transportation segment would have jumped 32% in the quarter.
Finally, earnings in Plains All American's facilities segment slipped 2% year over year, mainly because of the impact of asset sales and lower revenue from the company's NGL fractionation facilities, which have some exposure to commodity prices as they transform raw NGLs into higher-valued products, such as propane. Absent the asset sales, Plains All American would have grown earnings from its facilities segment by 2% year over year.
Check out the latest Plains All American earnings call transcript.
Image source: Getty Images.
A look at the outlook
Plains All American Pipeline delivered exceptional progress on its strategic plan last year, which was evident in its financial results. Overall, the company's earnings came in nearly 29% above 2017's level, -- and 16% higher than its initial forecast -- which, when combined with some asset sales, enabled it to end the year with a leverage ratio of 3.4 times debt-to-EBITDA, below its 3.5 to 4.0 target range. At the same time the company paid down debt, it also invested in expansion projects such as Sunrise II and Cactus II, which should drive growth in 2019.
Those projects have Plains All American estimating that its adjusted EBITDA will rise 2.6% this year, while DCF per unit will increase by about 5%. While that's a much slower rate than last year, it's due to the sale of a stake in BridgeTex and the assumption that supply and logistics earnings won't be quite as robust this year. Normalizing for those two impacts would put fee-based earnings growth at 11%.
Meanwhile, Plains All American has been busy capturing expansion opportunities that should drive growth beyond this year. The company and partners ExxonMobil (XOM 1.37%) and Lotus Midstream recently sanctioned the Wink to Webster (W2W) Pipeline that should start up in the first half of 2021. Plains will lead construction on that project, which is crucial to supporting the growth of ExxonMobil and other producers in the Permian Basin. In addition, the company secured several other Permian-focused projects that when combined with W2W will boost its anticipated capital spending level from an initial budget of $650 million up to $1.1 billion this year. That number could increase further, given that the company has several other projects in development, including a reversal of its Capline pipeline that could be in service as early as the third quarter of next year.
A great end to an exceptional year
Plains All American Pipeline's turnaround plan is delivering results. The company has returned to growth mode and strengthened its balance sheet, which has given it the financial flexibility to capture new opportunities and probably boost its high-yielding distribution to investors later this year. That combination of growth and income could give the company the fuel to deliver market-beating returns in the coming years.
