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Top Picks 2020: Plains All American Pipelines LP (PAA)

01/20/2020 5:00 am EST

Focus: ENERGY

Tim Plaehn

Lead Income Analyst, The Dividend Hunter

Plains All American Pipelines LP (PAA) — a top pick for aggressive investors — is an energy midstream services company that should provide a strong move up in 2020, asserts income expert Tim Plaehn, editor of The Dividend Hunter.

Plains has suffered tremendously from the energy sector bear market that started in September 2014. At that time, PAA was trading for over $60 per unit. The quarterly dividend is down by half from mid-2016. So, what makes me think that 2020 will be the turnaround year for Plains All American Pipelines?

Plains is a crude oil pipeline and storage company. The pipeline network stretches from Canada to the U.S. Gulf Coast. It is a major transporter out of the Permian Basin and is one of the largest owners of storage in Cushing, Oklahoma.

In August 2017 Plains announced a leverage reduction plan, to put the company into a more secure financial situation. At that time the quarterly dividend was reduced from $0.55 per unit down to $0.30, a 45% slashing. The reduction retained $1.1 billion over the next six quarters.

The company sold about $1 billion in assets and the combination of sales and cash retention reduced the total corporate debt from $11.15 billion down to a current $9.2 billion. More importantly the long-term debt to EBITDA leverage ratio dropped from 5.1 times in Q3 2017 down to a current 2.8 times.

Plains continued to grow its business over the last two years. Net income climbed from $1.10 per share in 2017 to a forecast $2.35 in 2019. Distributable cash flow (DCF) climbed from $1.82 per share in 2017 to a forecast $2.85/share for full-year 2019. Think about this, at $18 per share, PAA is trading at 6.3 times free cash flow. Flipped over, the stock has a 15.8% cash flow yield.

Plains increased its quarterly dividend by 25% after the first quarter of 2019. Current DCF gives 2.0 times coverage of the current distribution rate. That is huge in the MLP world, where 1.3 to 1.5 times coverage is norm for high-quality MLPs.

Plains continues to grow, with at least four projects coming online over the next year. At the same time, management has stated they are targeting distribution coverage of at least 1.3 times. They are currently at 2.0 times. There is tremendous room for a large dividend increase in 2020, or for the company to restart a program of quarterly dividend increases.

The second half of 2019 was another severe leg down in the five-year bear market for energy midstream. For this sector it feels like what the entire stock market was like in March 2009. With continued EBITDA and cash flow growth, plus solid to great dividend increases in 2020, I expect PAA to be a $30 stock by the end of 2020.

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