At first glance, Plains All American Pipeline's (NYSE:PAA) fourth-quarter results looked awful. The oil pipeline MLP's earnings sank nearly 10% while its cash flow tumbled more than 20%.

A closer look, however, showed that the company's performance was much better than it might seem. Because of that, and what the pipeline giant sees ahead, its 8.6%-yielding payout is not only on solid ground, but likely headed higher.

Drilling down into Plains All American's fourth-quarter earnings

Metric

Q4 2019

Q4 2018

Change

Adjusted EBITDA

$860 million

$949 million

(9.4%)

Distributable cash flow (DCF)

$525 million

$679 million

(22.7%)

DCF per unit

$0.72

$0.94

(23.4%)

Data source: Plains All American Pipeline.

While Plains All American's earnings and cash flow declined compared to the year-ago period, its results came in better than expected. That pushed its full-year numbers well ahead of its guidance. Adjusted EBITDA, for example, came in at $3.237 billion, which was 5% above the forecast it provided during the third quarter and up 21% versus 2018. Distributable cash flow, likewise, came in 5% higher than its guidance, which pushed its full-year total to $2.178 billion, or $2.91 per unit, 22% above 2018's level.

Fueling that expectation-beating result was the still-strong performance of its volatile supply and logistics segment:

Plains All American Pipeline's earnings by segment in the fourth quarter of 2019 and 2018.

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

While supply and logistics earnings tumbled 32% year over year, that's because 2018's fourth quarter was an outstanding one for this segment. That masked the fact that its results in 2019's fourth quarter were $133 million ahead of its forecast. That's because the company was able to overcome a less favorable difference in the price of crude oil in the Permian Basin compared to other markets thanks to higher margins in its natural gas liquids (NGL) activities. Further, it accelerated between $25 million and $30 million of 2020's expected earnings into last year's tally.

Meanwhile, the company's steadier fee-based segments also exceeded expectations during the period. Earnings in the transportation segment rose 6% year over year and came in $7 million above its forecast. Driving that result was higher volumes on the company's Permian Basin oil pipelines, including strong performance on the Cactus II line that started up in August.

Facilities' earnings declined by about 3% versus last year's fourth quarter, due mainly to lower activity at some of its rail terminals. However, the segment's EBITDA was $20 million higher than its outlook, thanks to lower-than-anticipated costs.

The company's better-than-expected showing enabled it to generate enough cash to cover its high-yielding payout by an ultra-comfortable 2.17 times for the year. Further, it helped push its debt-to-EBITDA ratio down to 2.8 times, which is below its 3.0 to 3.5 times target range.

A closeup of a calculator with stacks of coins next to it.

Image source: Getty Images.

A look at what's ahead for Plains All American Pipeline

Plains All American Pipeline doesn't expect a repeat performance out of its supply and logistics business this year because the industry completed several new oil pipelines. As such, it won't be able to buy oil at as wide a discount in the Permian Basin nor sell it for as big a premium along the Gulf Coast. Because of that, it expects this segment to generate only $75 million in EBITDA in 2020, which is a significant decline from the $803 million gusher it produced last year.

The company also expects a slight decline in its facilities business, with earnings falling from $705 million in 2019 to $680 million this year, due in part to planned asset sales, including its Los Angeles crude terminal assets.

Partially offsetting these declines will be the growth in its transportation segment, where Plains All American sees its earnings rising from $1.722 billion in 2019 to $1.82 billion this year. Driving that growth will be a full year of Cactus II and a recently signed joint venture with Felix Midstream, partially offset by the sale of a 10% interest in its Saddlehorn Pipeline.

The decline in earnings will negatively impact Plains All American's cash flow, which it expects will fall to $1.65 billion, or $2.25 per unit. However, that's still enough money to comfortably cover the company's current distribution by about 1.57 times -- although Plains All American expects to increase that payout by around 5% this year.

That strong coverage ratio will allow the company to retain about $600 million in cash, which will enable it to finance a large portion of its planned $1.4 billion in expansion-related spending, mainly on stable fee-based pipelines. It intends to bridge some of the gap, as well as fund its $300 million transaction with Felix Midstream, by selling a total of $600 million of assets this year. That will enable Plains All American to maintain its strong balance sheet.

Those expansion projects, meanwhile, have the company on track to start growing its earnings again next year as they come online. Because of that, and the anticipation that its expansion-related spending will decline, the company expects to generate lots of free cash after paying its distribution in the future, which it could use to further increase its payout or buy back some of its beaten-down units.

This high-yield dividend has the fuel to keep heading higher

Plains All American has benefited from the strong performance of its volatile supply and logistics business over the past year. Unfortunately, that segment has started to run out of fuel, which made the fourth quarter and the company's 2020 outlook look weak in comparison to the prior periods. That masks the fact that the company's fee-based businesses continue to perform well. Because of that, its high-yielding dividend not only seems safe, but should continue growing in the coming years as it keeps expanding its steadier segments.