Plains All American Pipeline (PAA 0.58%) spent the past couple of years shoring up its financial profile by selling assets. That gave it the funds to invest in high-return expansion projects. Those moves are starting to pay dividends. Not only has the oil pipeline master limited partnership (MLP) delivered exceptional financial results this year, but it has also boosted its distribution to investors by 20%.
The company expects both trends to continue over the next few years. That was evident from the comments of CEO Willie Chiang on the second-quarter conference call. He spent some time discussing five of the company's latest expansion projects, which should fuel high-return growth in the coming years.
Image source: Getty Images.
1. Wink-to-Webster keeps getting better
Chiang started the expansion project highlight reel by stating that "we have continued to enhance the Wink to Webster project," which is a large-scale oil pipeline in the Permian. The company added three new partners to the project during the quarter and expects to add one more in the future. Not only will these partners help fund the project, but they're also bringing significant long-term volume commitments. On one hand, the addition of several new partners has reduced Plains All American's interest in the project from 20% to 16%. However, it will now earn a much higher return on the capital it invests in the new pipeline.
2. We're moving forward with the Diamond and Capline projects
Next, Chiang noted that the company and its partners "sanctioned an expansion and extension, which will connect the Diamond Pipeline to the Capline system." As part of this project, Plains All American and its partners will reverse the flow of the Capline system. That will enable them to better meet the needs of oil shippers in the mid-continent region. The companies moved forward with the project after receiving "a sufficient level of long-term commitments to achieve our targeted investment return threshold." However, Chiang also noted that the partners are "working to further enhance returns by bringing additional committed volumes to the system."
3. Saddlehorn is getting a boost
Chiang then stated that the company and its partners "announced a capacity expansion of up to 100,000 barrels per day, plus a new Ft. Laramie origin on Saddlehorn pipeline, which is underpinned by long-term volume commitments." They're mainly adding new pumping capacity, which is a low-cost way to increase the amount of oil that can flow through a pipeline. As such, the company will earn an attractive return on its investment in this project.
Image source: Getty Images.
4. We're partnering up on Red River
Chiang followed by pointing out that the company "announced an expansion and new joint venture on our Red River pipeline system." Refiner Delek (DK -1.31%) drove this project by increasing its long-term volume commitment on the pipeline. In addition, Delek's MLP, Delek Logistics (DKL 0.88%), spent $128 million for a 33% stake in the system. Chiang commented by saying "this transaction expands our long-term alignment with a strategic partner and shipper, [it] supports and more than funds the 85,000 barrel-per-day capacity expansion, it increases Plains net committed annual cash flow, and it provides an additional source of funding for our capital program or debt reduction."
5. Red Oak is moving forward
Finally, Chiang noted that the company and refiner Phillips 66 (PSX -0.40%) are "proceeding with pre-construction activities" on the Red Oak pipeline that they officially approved in June. This pipeline will move oil from the Permian Basin as well as a major storage hub in Oklahoma to the Texas Coast. The partners secured long-term volume commitments for the project, including barrels that will flow into Oklahoma on Phillips 66's Liberty Pipeline, which it approved in conjunction with Red Oak.
Lots of visible growth coming down the pipeline
Chiang summed up the company's recent initiatives by stating: "Each of these projects demonstrate opportunities that are enabled by our existing asset base, operational capabilities, and commercial presence, which allows us to build and position ourselves for the future with accretive growth. These projects will be completed over the next 2-3 years, and we expect to be able to self-fund the equity portion of our investments through this time period."
Plains All American is doing two things to fuel high-return growth in the coming years. First, it's focusing on expanding existing systems since that reduces risk and improves returns. Second, it's working closely with industry partners to enhance these projects through both volume and funding commitments. As a result, the company boosted its growth potential without stretching its budget. This year, for example, it will almost completely cover the net $150 million spending increase from these project additions with the proceeds of its deal with Delek. The company will therefore earn a much higher return on its investment, which should enable it to create much more value for its investors in the coming years. It will also free up cash flow that Plains All American could use to continue increasing its high-yield distribution. That enhanced growth profile adds to the reasons it's a top oil stock to buy.
