Last year was a "year of execution" at Plains All American Pipeline (NYSE:PAA), according to remarks from CEO Willie Chiang on the oil pipeline company's fourth-quarter conference call. Not only did the company achieve the aim of its balance sheet improvement plan, but it also expanded its footprint in the fast-growing Permian Basin and delivered on several other commercial and operational initiatives. Those factors enabled the company to produce guidance-crushing results for the fourth quarter, as well as for the full year.
Those achievements position the company for more success in the coming years. Overall, the company's management team noted three things that investors should know about what lies ahead.
1. We expect to continue growing earnings in 2019
CEO Willie Chiang went through the company's guidance for 2019, noting that it anticipates generating $2.75 billion in adjusted EBITDA this year. While that's only about 3% higher than 2018's level, that's due to two notable factors. First, the company's supply and logistics business -- which is highly sensitive to dislocations in the oil market as well as commodity prices -- prospered last year, which probably won't be the case to the same extent in 2019. In addition to that, the company sold part of its interest in the BridgeTex pipeline last year, which will impact results in 2019. Chiang adjusted for these two items, stating that "in regards to our fee-based business, we expect solid year-over-year fee-based growth of 8%, or 11% pro forma growth year-over-year adjusted for our partial sale of BridgeTex." That number better reflects the underlying growth the company will deliver this year.
2. We're well positioned to keep expanding beyond this year
Plains All American Pipeline expects to continue expanding its fee-based earnings beyond 2019, driven by pipeline projects it has under way and in development. Chiang noted that the company expects to start partial service on its Cactus II pipeline late in the third quarter of this year, followed by full service next April. In addition to that, Chiang stated that the company "advanced several 'complementary Permian' gathering, intra-basin, and terminalling expansion projects, which are expected to be placed into service throughout the first-half of 2019 and ramping into 2020."
Meanwhile, Chiang pointed out that "we also positioned ourselves to advance multiple growth capital opportunities that will drive fee-based growth well beyond 2019." Among the largest was the recent sanction of the Wink to Webster Pipeline joint venture with ExxonMobil (NYSE:XOM) and Lotus Midstream. That project, which is crucial to supporting ExxonMobil's expansion efforts in the region, should be in service and generating cash flow in the first half of 2021. Finally, Chiang noted that the company finalized joint venture agreements with Marathon Petroleum (NYSE:MPC) and other partners to work on a reversal of the Capline Pipeline, which if successful would lead to an extension and expansion of Plains All American's Diamond Pipeline joint venture with Valero Energy (NYSE:VLO). Those projects could enter service in phases starting in the third quarter of 2020 through early 2022. "Successful advancement of the expansion of these existing assets may allow us to add to our capital program in 2019 and 2020 at attractive returns," according to Chiang, not only for Plains All American but joint venture partners Marathon Petroleum and Valero Energy, which would also benefit from increased supply flexibility at their refineries.
3. We can now self-fund growth with room to spare
CFO Al Swanson then took over the call to discuss the company's financials. He stated that "we enter 2019 with a much-improved balance sheet and improved financial flexibility and expect to generate DCF (distributable cash flow) per common unit of $2.58, which implies more than $900 million of cash flow in excess of distributions, based on our current distribution level." Further, the CFO noted that "we have substantially completed our previously announced deleveraging plan and expect to formally complete this plan in the first half of 2019." As a result, the company is in the position where it can "self-fund at least the equity portion of this capital program with retained cash flow." Given its current $1.1 billion capital budget, and the assumption that it will fund 50% of that with equity and the other half with debt, Plains All American is in the position where it will generate significant excess cash above its current distribution level. Because of that, the company continues to believe that it will increase its payout this year, potentially in May, when it makes its first quarter payment.
A bright future
Plains All American Pipeline's turnaround plans started paying dividends last year as the company's financial results bounced back big-time. While the pipeline operator doesn't expect profits to expand quite as fast this year due to some headwinds, it does see continued growth for the foreseeable future thanks to the expansion projects it has under way and in development. That should enable the company to start increasing its high-yielding distribution again later this year, which could continue heading higher for the next few years if the company keeps locking up additional expansion projects. That growing income stream makes it an ideal option for income-seeking investors to consider.