Plains: Premier Play in Pipelines

09/24/2015 7:00 am EST

Focus: MLPS

Tim Plaehn

Investment Research Analyst, Investors Alley

Our latest featured recommendation is the premier master limited partnership for crude oil pipelines and storage, asserts Tim Plaehn, editor of Tax Smart Hunter.

Plains All American (PAA) has a decade long history of above average distribution growth and total returns.

And, in a moment of clairvoyance, the management team at Plains All American forecast the energy price declines in early 2014.

Because of their preparedness, they have been positioning the company to get through the current challenging times and are ready to resume growth when energy prices are expected to recover after 2016.

PAA owns and operates one of the largest crude oil gathering, pipeline, and crude storage networks in North America.

Plains has a very positive outlook of the North American energy sector for the intermediate- and long-terms, but expects the current low prices to negatively affect results through at least the latter part of 2016.

Plains has an investment grade credit rating, which gives a low cost of debt capital to fund growth and acquisition projects.

Historically, Plains All American Pipelines has provided an above average combination of yield plus distribution growth from a very high quality MLP.

Historically, this MLP has carried a 5% to 6% yield, so the current rate of 8% is well above average.

Management has indicated that it expects distribution growth of 0% to 3% for 2016. They have stated that more typical high single digit growth rates should resume in 2017.

When distribution growth again ramps up, the market should push the yield back down to the historic range, producing nice unit price gains compared to the current value.

Our recommendation is to buy and accumulate PAA units at the current above average yield. This is a buy-and-hold investment that will pay off with attractive total returns later in the decade (2017-2019).

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