Units of Plains All American Pipeline (NASDAQ:PAA) have shed about half their value this year. That's due to crashing crude prices, which will impact oil production rates in the country and the volumes flowing through the master limited partnership's assets. This issue will affect the company's cash flow, which led it to slash its distribution again this year.
However, that steep sell-off in Plains All American's unit price probably has some value-hunting investors wondering if now's a good time to buy. Here's a look at the pros and cons of investing in this pipeline stock these days.
The buy thesis for Plains All American Pipeline
All the turbulence in the oil market will hurt Plains All American's financial results this year. That's evident in its updated guidance. The pipeline company currently anticipates that it will generate $1.575 billion or $2.16 per share of distributable cash flow this year, putting it down 28% year over year. However, on a positive note, that's enough cash to cover its reset distribution -- which currently yields 7.8% -- by a comfortable 2.4 times and all but about $55 million of its planned capital expenses. The company can easily cover that shortfall with asset sales, which have tallied about $440 million already this year.
With asset sales exceeding spending, Plains All American has continued to improve its balance sheet. It has investment-grade rated credit from two of the three rating agencies and a leverage ratio of 3.0 times debt to EBITDA, which was at the low-end of its 3.0-3.5 times target range. Because of that, it has a solid financial profile and lots of flexibility.
Finally, given Plains All American's unit price plunge this year, it sells for a dirt cheap valuation. With the company on track to generate $2.16 in cash flow, and units currently trading at less than $9.50 apiece, Plains All American sells for less than five times cash flow. That's well below the historic mid-teens multiple of most pipeline companies.
Reasons to be wary about Plains All American Pipeline
One concern with Plains All American Pipeline is its cash flow volatility, especially from its market-sensitive supply and logistics business. That business generated a gusher of earnings last year, hauling in $803 million of EBITDA (or about 24% of the total). However, Plains All American only expects it to generate about $225 million in EBITDA this year (roughly 9% of the total) due to weaker market conditions. This business' volatility reduces the certainty of Plains All American's outlook since its earnings could underperform its modest expectations.
Another worry with Plains All American is the impact lower oil prices will have on its typically stable transportation assets. Pipeline volumes are usually very predictable because of historical well production data. However, many producers shut in a portion of their wells this year because of lower prices, which will affect the fees the company earns as volumes flow through its systems. While some have oil companies have restarted their pumps following the recent rebound in oil prices, others haven't in an abundance of caution. If they keep holding back, it could cause Plains All American's transportation earnings to miss its forecast.
Finally, the main attraction of MLPs like Plains All American is their lucrative distributions. While the company currently offers an enticing yield, it has a poor track record when it comes to its dividend. It has cut it three times in the past five years with a 20% increase sandwiched in between the last two cuts. By doing so, the company has damaged its reputation with income-focused investors, which has weighed on its valuation.
Too risky right now
On one hand, Plains All American offers investors a high-yield and a cheap valuation (assuming it achieves its 2020 guidance). However, there's a lot of uncertainty with its forecast and volatility in its cash flow and distribution. It doesn't seem worth buying, especially when there are better options out there for income investors these days.