Last year was a brutal one for the oil industry. The COVID-19 outbreak torpedoed oil demand, forcing producers to reduce their output. That impacted the flow of oil going through pipeline systems, weighing on the cash flow of MLP Plains All American Pipeline (PAA 0.57%), as evidenced by its recent fourth-quarter earnings report. That put pressure on its unit price -- which has plunged more than 45% over the past year -- and pushed its dividend yield up to 7.8%.
However, the oil pipeline company believes its valuation has fallen too far given the cash flow generating capability of its midstream operations. It's accelerating its strategy to bolster its value.
Drilling down into Plains All American Pipeline's fourth-quarter results
|
Metric |
Q4 2020 |
Q4 2019 |
Year-Over-Year Change |
|---|---|---|---|
|
Adjusted EBITDA |
$559 million |
$860 million |
(35%) |
|
Distributable cash flow (DCF) |
$326 million |
$525 million |
(37.9%) |
|
DCF per unit |
$0.46 |
$0.71 |
(35.2%) |
Data source: Plains All American Pipeline.
The fourth quarter was brutal for Plains All American Pipeline, as that table shows. It marked the end of a rough year for the oil pipeline operator as its adjusted EBITDA and DCF both declined by more than 30%. Weakness across all three of its operating units weighed on the oil pipeline MLP:
Data source: Plains All American Pipeline. Chart by the author.
As that chart shows, Plains All American's transportation earnings fell 15% during the quarter, pushing its full-year total down by 6%. Lower volumes because of weaker oil prices were to blame, as it reduced the number of new wells its customers completed last year. Asset sales also had a slight impact. Adjusting for asset sales, transportation earnings would have declined 14% during the fourth quarter and 5% for the full year.
Facilities earnings dipped 2% during the quarter, though they were up 4% for the full year. Decreased activity at some of its rail terminals due to unfavorable market conditions dragged down the segment. The other issue was asset sales. Adjusting for those sales, earnings from its facilities would have increased by 7% during the fourth quarter and full-year thanks to its cost-savings initiatives and increased capacity at its crude oil storage terminals.
Finally, earnings from the company's supply and logistics activities plunged 98% during the fourth quarter and 74% for the full year. The culprit was a much narrower gap between the price the company could buy oil for in production basins and the price the company could charge when selling it at market centers.
Image source: Getty Images.
A look at what's ahead for Plains All American Pipeline
Plains All American anticipates that many of the headwinds it faced last year will remain in 2021. The MLP expects to generate about $2.15 billion of adjusted EBITDA this year and roughly $1.29 billion of DCF, down 16% and 23%, respectively, from 2020's levels. The biggest headwind will be the continuation of weak market conditions on its supply and logistics business, which will cause those earnings to tumble another 76%. Meanwhile, asset sales and other issues will also weigh on the transportation and facilities segments.
The pipeline company plans to sell roughly $750 million in assets this year, an increase of $150 million from its initial target and up from about $450 million in 2020. It's boosting its asset sale program to generate more cash in 2021, giving it the flexibility to pay down additional debt and repurchase more shares. Overall, the company expects to have more than $1 billion at its disposal, which includes the $300 million in excess cash flow it anticipates producing after covering its distribution and $425 million capital spending program and the proceeds from asset sales.
The MLP plans to allocate about 75% of those funds toward debt reduction, with the balance likely going toward buying back its beaten-down units. Thus, the $150 million of incremental asset sales it plans to complete in 2021 implies it can buy back an additional $37.5 million of its units this year, or about $262.5 million overall. Driving those incremental repurchases is the deep discount in Plains All American Pipeline's valuation. The MLP expects to generate $1.82 per unit in cash this year, yet its units trade at less than $9 apiece, implying that it sells for a bottom-of-the-barrel valuation of less than five times its cash flow.
That allocation percentage will start shifting in 2022 as debt comes down, giving it more flexibility to return cash to investors through additional unit repurchases. After covering its current dividend, it expects its excess funds will rise as it wraps up its current expansion program and those projects start generating cash. At the same time, investment spending will decline to a range of $200 million to $300 million in 2022 and beyond since the oil industry likely won't need too much new infrastructure any time soon.
An insanely cheap pipeline stock
There's no doubt that the current turbulence in the oil market is affecting Plains All American. However, the company still generates lots of cash. It will likely continue doing so for years because it operates in one of the world's lowest-cost oil basins. It has the funds to continue paying its high-yielding dividend and start repurchasing its dirt-cheap units. Those dual fuels could combine to generate big-time total returns in the coming years as the oil market recovers.
