What: Units of Plains All American Pipeline (NYSE:PAA) and its general partner, Plains GP Holdings (NYSE:PAGP), bounded higher on Tuesday morning. The units of both midstream companies were up nearly 25% at the open, before trailing off a bit. Still, units were up nearly 8% at 11:00 a.m. ET.
So what: Fueling today's surge was Plains' decision to keep its distribution unchanged from the previous levels of $0.70 per unit at Plains All American and $0.231 per unit at Plains GP. This surprised the market because there were concerns that the companies would need to reduce these payouts due to the impact weak commodity prices were having on their ability to access the capital market to fund capex investments.
Instead of reducing its distribution and using that cash to pay for its 2016 capex plan, Plains All American announced that it will issue $1.5 billion of newly authorized convertible preferred units, which will cover its equity financing needs through at least the end of 2016. This will enable the company to strengthen its balance sheet and liquidity while also addressing concerns about its ability to sustain its current distribution rate. In securing Plains All American's distribution, it also secured Plains GP's payout because it is funded by the distributions it receives from Plains All American.
Now what: With this one move, Plains All American and Plains GP have secured the cash they need to both fund growth and maintain their current distribution rate for at least the next year. That enables them to focus on executing projects instead of waiting for commodity prices to settle down.
Matt DiLallo has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.