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The "Plains" Family of MLPs
07/10/2018 5:00 am EST
My favorite MLPs come from the Plains “family” of master limited partnerships – that’s Plains All-American (PAA) and Plains GP Holdings (PAGP), explains Elliott Gue, editor of Energy & Income Advisor.
Since Plains GP Holdings’ only asset is a stake in Plains All-American, these companies are essentially the same thing. The only major difference for investors is that Plains GP pays dividends reported on a 1099 form to the IRS while Plains All-American is a classic MLP which pays distributions and reports on a standard K-1 form.
Plains All-American is also a name we’ve been full circle on over the years. Back in 2013 and 2014, Plains was considered one of the most stable and highest-quality MLPs in the business and had an investment-grade credit rating.
However, we soured on the name when oil prices started coming down in late 2014 and early 2015 due to the partnership’s hefty leverage and commodity price exposure through its Supply & Logistics segment.
Fortunately, we had it rated a sell as they’ve cut distributions twice over the past two years and the MLP has been hit hard. The good news: We now think Plains is on the mend and has an enviable slate of new organic growth projects, generally aimed at the Permian supply bottlenecks we discussed earlier.
Most of Plains’ commodity price exposure is through that supply and logistics business. Basically, this is a sort of “trading” operation where Plains buys oil in one market (say from producers around Midland), moves the crude along its pipes to another hub (like Cushing) and immediately sells the oil there. Since both the “buy” and the “sell” of this time are done simultaneously, there’s no direct price risk.
Management is guiding for an additional 14% to 15% year over year growth next year. And it’s important to note that this growth is high quality — it’s based on solid projects primarily related to the Permian Basin that feature long-term guaranteed revenues and take-or-pay type clauses. Around 80% of their capital spending plans are tied to the Permian.
Plains eliminated all of its incentive distribution rights (IDRs) as part of a simplification transaction a couple of years ago and has paid down a hefty debt load racked up to fund all these new pipelines via a combination of non-core asset sales, money retained through the reduced distribution and equity issuance.
By early next year, Plains should be down to its targeted leverage range of 3.5 to 4.0 times EBITDA. We think it will be in a position to start raising distributions again sometime in 2019 or 2020 especially when you consider the current coverage ratio is expected to be a whopping 1.7 times in 2018. And the company has a new CEO, which is a position at this stage in its transition and growth plan.
We’re adding Plains GP Holdings to our Focus List of top buy recommendations because it pays on a 1099 and a lot of our readers tell us they’re looking for MLPs that won’t add to their stack of K-1s at tax time. If you prefer a K-1, Plains All-American is a valid option as a buy as well. Both issues yield around 4.75%.
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