PAA - Plains All American Pipeline Management Carves In Stone Its Future

Summary

• Excess cash going forward seems to be in the $700 million plus per year range.
• With a common ratio guided at 2+ for the year, it seems that another dividend increase is in store at the end of the year.
• Our initial prediction for $1.1 billion of free cash was shunted by an unexpected or undisclosed distribution showing up at the end of 2022.

Investors appreciate companies, which layout in solid stone, visions, directions, and forecasts even with polished imaging. Plains All American Pipeline ( PAA ), in our view, just rolled out the engraved stone, all polished. In our last article on Plains, we focused heavily on cash generation and possible future uses. We included a table based off of a figure management included in one of its government filings. The purpose was to help investors understand possible dividend changes, debt extinguishing, or repurchasing of preferred shares. Gratefully, management provided more clear communication on its cash generations and uses. This clarity is materially different than the sampling following the figure in the filing. With the stone more perfectly polished, let's view the reflected image.

4th Quarter & Year

Beginning with the 4th quarter and yearly report, it is evident that Plains generated a lot of cash in 2022 and will continue to do so in 2023, but at a reduced rate. For the quarter and year, Plains reported:

• 4th quarter EBITDA of $660 million and for the 2022 $2.5 billion.
• Completed or announced several win-win strategic transactions in both our Crude Oil and NGL segments:
  • Cactus II pipeline.
  • Advantage pipeline.
  • Empress facilities
  • Keyera Fort Sask minority JV interest sale netting $270 million.

Considering 2023 capital, the company plans to complete Wink-to-Webster plus Permian debottlenecking.

Next, management forecasted key results for 2023 summarized in the next slide.

The company forecasts EBITDA at the high end of $2.55B with FCF of $1.60B, investment capital targeted at $325MM. The slide ends with the base assumptions. The crude segment is expected to grow while NGL likely decreases. The coming sale of Keyed Fort Sask adds more focus to help mitigate the NGL weakness. Much of the expected growth comes from the Permian Basin. Jeremy Goebel, Executive Vice President and CCO, offered this comment, "Last February, we got into roughly approximately 600,000 barrels a day of growth in '22 and '23. You're going to exit '22 at roughly 5.7 million barrels a day, exit '23 at roughly 6.1 million to 6.2 million barrels a day." For the Permian JV system, Plains forecast a growth of 350,000 barrels per day.

With regard to NGL, the focus is on optimizing the business, one business was sold, another fully purchased. Fort Saskatchewan facility will be expanded. The C3+ product sales volumes are 80% hedged.

During 2024, another positive miscellaneous cash transaction is expected, $225 million for insurance proceeds.

Cash Usages

A summary of the proposed cash usage follows in the next table.

* POP JV and Delaware System growth plus others.

Plains still has outstanding, two preferred securities Series A and B. Both changed rates, adding $26 million and $20 million in payments going forward.

More details on cash usage and metrics follow in the next slide.

Hidden inside the slide is the guided distribution coverage at 215%. This note is important in that the company's plan for increasing dividends requires a minimum of 160% coverage. It appears that investors could expect another $0.15 increase ($100 million) at the end of this year.

We are also including a final summary outlining cash leftover after all expense being approximately $600 million for debt management.

We conclude our discussion of cash with this tidbit. "The way we look at it is roughly, it's different for the gathering of long haul business. But a simple approach would be 100,000 barrels a day would have roughly $10 million to $15 million of EBITDA impact to net to Plains." This commit by management offers investors a tool to monitor EBITDA changes with changes at the Permian Basin.

A Comparison

For us following Plain's cash generation and usage is paramount. We recently published an article, Plains All American: Dividend Increase In The Cards , outline future cash flows and possible uses. Future metrics including distribution relied almost completely on the numbers shown in an included table shown next.

Our focus resides with 2023. We calculated $1100 million in cash. Plains guided $600, a material difference. The above slide clearly assumes $2500 in EBITDA, which seems conservative. So the first difference of a $100 million seems more likely to dissipate during the year. That still leaves $400 million. We noticed a distribution charge appearing in 2022 and mostly absent in 2021 and 2020 of approximately $300. We had left this material distribution out of the calculation. A payment this size represents approximately $0.40-$0.50 a year in distributions. We found no explanation. In our view, free cash after all expenses will likely be at or near $700 million.

Coming Priorities

Plains had $1.1 billion in senior notes due this year. Using cash on-hand and coming cash flows, management plans to pay this off lowering "leverage to approximately 3.5 times." Thus far, $400 million had been paid.

At this time, management has no plans to repay the Series A preferred now with a par of $26.25.

Other debt or preferred issues facing the company are $750 million due in 2024, $1.0 billion in 2025 and $750 million in 2026. After 2026, debts due become scattered through coming decades.

Risk

A collapse in crude production from another world health dilemma would clearly impact Plains negatively. A severe recession might also cause issue, but with the U. S., a lower cost source of fossil fuel energy, increased exports are more likely rather collapses in oil production.

Management offered this comment in the prepared remarks,

"Plains is well-positioned to improve returns of capital to unitholders, through a capital allocation framework that targets multiyear distribution growth, an 8.5% current yield, significant free cash flow generation and balance sheet flexibility built on the strength of our strategically located Crude and NGL footprint across North America."

With $600 to $800 million a year in free cash after all expenses, increases in distribution and debt management seems congruent. In our previous article, we thought $2.00 in distributions might be possible, but with the $300 million of other distributions facing the company, that amount seems high. A more likely value might be something north of $1.5 resulting in a unit price in the high teens. The stone was polished. Management held it up for viewing, something we so much appreciate. Cash generation looks strong offering investors an opportunity to purchase especially on weakness (prices under $13 and perhaps closer to $12) at lucrative prices. We rate Plains stock a buy when purchased on weakness.

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