Plains All American Pipeline (PAA 0.32%) has more direct exposure to fluctuations in commodity prices and volumes than some of its peers in the energy midstream sector. Because of that, the downturn in the oil market is having a direct impact on its operations and cash flow. That was clear in the company's first-quarter report as well as its outlook.
Drilling down into Plains All American Pipeline's first-quarter results
|
Metric |
Q1 2020 |
Q1 2019 |
YOY Change (Decline) |
|---|---|---|---|
|
Adjusted EBITDA |
$795 million |
$862 million |
(7.8%) |
|
Distributable cash flow (DCF) |
$596 million |
$654 million |
(8.9%) |
|
DCF per unit |
$0.82 |
$0.90 |
(8.9%) |
Data source: Plains All American Pipeline.
Plains All American's earnings and cash flow slumped year over year due to the impact that changes in market conditions have on its supply and logistics business:
Data source: Plains All American Pipeline. Chart by author.
As that table shows, earnings from the supply and logistics segment tumbled by nearly 50%. That's because recently completed pipelines and lower oil prices compressed the difference between regional oil prices, affecting the company's ability to exploit pricing dislocations. Likewise, margins on natural gas liquids shrank due to weaker pricing.
Plains All American Pipeline was able to partly offset the issues in its more volatile supply and logistics business by delivering healthy growth in its transportation and facilities segments. Transportation earnings jumped 11% thanks to higher volumes on its Permian Basin pipeline systems, due in part to the completion of the Cactus II pipeline last August. That more than offset lower volumes in the central region as a result of falling crude prices, which impacted production. Facilities earnings, meanwhile, leaped 14%, mainly because it was able to collect a deficiency payment on a long-term contract.
Image source: Getty Images.
A look at what's ahead for Plains All American Pipeline
CEO Willie Chiang noted that the company's first-quarter operating results "exceeded its expectations" because supply and logistics earnings didn't decline as much as anticipated. But he warned that "as the quarter progressed, the global response to the COVID-19 pandemic has led to an unprecedented energy supply-and-demand imbalance." That forced the industry to respond by significantly reducing refinery utilization and the drilling and completing of new wells, as well as shutting-in existing production in many areas.
Plains All American estimates that the current market dislocation will affect its full-year earnings by about $150 million compared with its guidance, pushing it 6% below last year's level. It anticipates a $300 million effect on transportation earnings on the assumption that volumes will decline 4% this year versus its prior view that they'd grow 10%. It expects to offset about half of this by capturing market opportunities in its supply and logistics business.
Because of these challenges, and the issues energy companies are having with access to credit, Plains All American made several adjustments to its strategy to improve its financial profile. These moves included reducing its capital spending program by 33%, or $750 million; cutting its dividend by 50%, which will save it $525 million per year, and making additional asset sales.
Those moves will enable the company to retain enough cash after paying its reset dividend to cover all but about $55 million of its planned expansion spending. That's a significant improvement from its initial view that there would be about a $1.115 billion shortfall between retained cash and expansion-related spending. As a result, the company will be able to strengthen its balance sheet via its plan to sell $600 million of assets, which will keep its leverage at the low end of its target range. That will enhance its ability to address a $600 million debt maturity next February.
Navigating a rough patch
Turbulence in the oil market forced Plains All American to adjust its spending so that it doesn't put any unnecessary pressure on its balance sheet. One of those changes was its dividend, which it slashed by 50%. But even with that reduction, Plains All American still yields around 9%. That's a compelling level, especially since the company could significantly boost that payout if market conditions improve next year, because it would benefit as its current slate of expansion come on line, and would no longer need to worry about that debt maturity. Because of that, it's a stock that yield-seeking investors will want to at least put on their watch list.
