Plains All American: Pipeline Profits

09/10/2014 7:00 am EST

Focus: STOCKS

Igor Greenwald

Chief Investment Strategist, MLP Profits

There are no sure things in MLP land; but you could get pretty close if you placed top-notch management at the helm of a large, geographically diversified midstream energy business with a solid balance sheet, decent yield, and numerous growth opportunities, asserts Igor Greenwald, editor of MLP Profits.

There are several companies and partnerships to which such a description might apply. But Plains All American Pipeline (PAA) somehow hasn’t made the cut to this point. That’s changing as of now, because it is no longer possible to ignore PAA’s many strengths.

These start with a transcontinental footprint that gathers crude in every major North American production basin and moves it by pipeline, rail, and barge to the refining and marketing centers on the coasts.

PAA also owns a big and expanding oil condensate stabilization facility in South Texas that should make it one of the primary beneficiaries of the recent move to permit processed condensate exports.

Plains invested $1.6 billion last year in organic growth projects and has ramped that up to nearly $2 billion this year.

It will spend $480 million to expand its market-leading midstream infrastructure in the Permian Basin of West Texas, and another $350 million on a new pipeline linking that basin with its joint-venture facilities in the Eagle Ford.

Thanks to the $2.2 billion of cash flow, PAA retained and reinvested over the last decade distributions per unit are already growing briskly, forecast to increase 10% this year.

PAA units already yield 4.6%, quite generous given that growth, the partnership’s financial strength, and the yield chase evident in the current bull market.
Experienced and well-regarded management is a key PAA intangible asset. CEO Greg Armstrong is a 33-year veteran of PAA and its corporate predecessors, and is widely respected as one of the sharpest minds in the midstream business.

The bottom line is that this conservatively managed MLP provides a decent, relatively safe yield with solid growth potential. The units should outperform in the near term as the price catches up to some of the sector’s more overextended favorites. We’re adding PAA to the Conservative Portfolio.

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