Plains All American Pipeline (PAA -0.39%) has been expanding its oil infrastructure in the Permian Basin as fast as it can in recent years. That strategy is already paying big dividends for the company's investors. During the recently completed first quarter, for example, the company benefited from the start up of its Sunrise II pipeline, which helped fuel a 19% increase in earnings from its transportation segment. That improvement in cash flow was one of the factors that allowed the MLP to give its investors a monster 20% distribution increase earlier this year, boosting its yield up to 6.4%.
However, one thing that was abundantly clear on the company's first-quarter conference call was that Plains All American has plenty of growth still ahead in the Permian.
It's in the midst of a building boom in the Permian
CEO Willie Chiang noted on the call that Plains All American has "added approximately 1.7 million barrels a day [BPD] of new Permian Basin system capacity" since the start of last year, which helped fuel the uptick in its transportation revenue. The company has more growth on the way. Chiang said that "by year-end, we expect this number to grow to more than 2.2 million BPD." Further, he pointed out that "this capacity is underpinned by a combination of long-term volume commitments and acreage dedications." Because of that, the company will be collecting steady cash flow on these investments as they enter service. These contractually secured expansion projects drive the company's forecast, which can grow the fee-based earnings of its transportation and facilities segments by about 8% this year.
Plains All American's earnings should continue growing at a healthy pace for at least two more years, driven by two needle-moving pipeline projects it has underway. Chiang provided a status update on both during the call. He stated that "Cactus II construction is progressing on schedule with partial service to Ingleside expected to be complete in the third quarter of 2019 and full service to Corpus Christi expected by the first quarter of 2020." Meanwhile, on the Wink to Webster project, Chiang noted that the company and its partners, including ExxonMobil (XOM 0.69%), are "full speed ahead on progressing the project, which is targeted to be placed into service in the first half of 2021."
It continues to find new expansion opportunities
On top of those large-scale pipelines, Chiang noted on the call that "we continue to sanction additional complementary growth projects in the Permian." During the first quarter, for example, Plains All American increased its 2019 capital spending plan by $250 million, driven in large part by new complementary projects in the Permian.
The company should be able to continue securing additional high-return complementary expansion projects given its strategic footprint in the Permian Basin, which makes it an ideal partner to meet the infrastructure needs of larger companies like ExxonMobil. Jeremy Goebel, executive vice president, commercial, at Plains All American, pointed out on the first-quarter call that "clearly we're aligned with Exxon commercially on the long-haul projects," which "does present other alternatives from a marketing or an intra-basin standpoint."
In addition to building out more complementary pipeline infrastructure to move oil from newly drilled wells to regional storage hubs, Plains All American also sees the potential to construct more terminal capacity. Goebel stated that "there's a need for operational storage" at its Wink hub "as we move more and more volume through there as the Delaware Basin grows." This opportunity could turn out to be more than just building additional storage tanks. Goebel said that "commercially, there is the potential that it could develop into a pricing hub similar to Midland."
There's also the possibility of additional long-haul oil pipeline projects, given the Permian's anticipated production growth profile. One forecast puts regional oil output on track to increase from 3.85 million BPD last year to nearly 8 million BPD by 2025 as producers like Exxon accelerate their expansion plans. That outlook suggests the region will need at least one more large-scale pipeline after Wink to Webster comes online in two years.
Lots of growth ahead
Plains All American Pipeline has enough expansion projects lined up to grow its cash flow at a healthy pace through at least 2021. That leads the company to believe that it can increase its high-yield distribution by at least a 5% annual rate over that time frame. However, the company's growth engine should remain well fueled beyond that period, given the anticipated production growth profile of the Permian as companies like Exxon use it to drive their long-term strategic plans. That should provide Plains All American with plenty of additional opportunities to expand its asset base, which would provide it with even more cash flow to continue increasing its dividend. That compelling combination of growth and income makes Plains All American an excellent oil stock to consider buying for the long haul.