Plains All American Pipeline Stock: Inflation-Thumping 8.6%-Yielder Hikes Dividend 21%
July 1, 2022
Why PAA Stock Is Worth Watching
Plains All American Pipeline, L.P. (NYSE:PAA) is an excellent oil and gas midstream company that has a history of providing its shareholders with reliable, ultra-high-yield dividends.
Despite concerns about an upcoming recession, the demand for oil remains high. The industry’s fundamentals—like time spread (price paid today versus a later date) and global oil inventories—support oil prices above the $100.00-per-barrel mark. We know the demand for oil is high because the premium paid for immediate barrels has been trending higher since May. At the same time, the global oil inventory deficit compared to normal levels is widening to record amounts.
For the week ended June 24, crude oil inventories fell by 2.8 million barrels, which was a far bigger drop than the projected 569,000 barrels. The crude oil supply at the Cushing, OK delivery hub dropped to 21.3 million barrels, its lowest level in eight years. (Source: “U.S. Crude Stocks Down, Fuel Inventories Up as Refiners Hit the Gas -EIA,” Reuters, June 29, 2022.)
Historically, contractions in global oil demand are rare, only occurring during the most severe economic downturns, like what we saw during the 2008/2009 financial crisis and the recent COVID-19 pandemic. Even during recessions, oil demand growth has slowed but remained positive.
This is good news for energy companies like Plains All American Pipeline, L.P., and points to future share-price gains from PAA stock and additional increases to its dividend.
Plains All American Pipeline, L.P. Has 18,300 Miles of Oil & Natural Gas Pipelines
Plains All American Pipeline is one of the largest independent midstream energy companies in North America. The company is engaged in the pipeline transportation, terminaling, storage, and gathering of crude oil and natural gas liquids (NGL) in the U.S. and Canada. (Source: “Investor Presentation: June 2022,” Plains All American Pipeline, L.P., last accessed June 30, 2022.)
The company operates through three segments: Transportation, Facilities, and Supply and Logistics.
The Transportation segment ships crude oil and NGL via pipelines, trucks, and barges. This segment is supported by long-term minimum volume commitments and acreage dedications. The Facilities segment includes storage, terminaling, and throughput services. This segment is supported by leased capacity and throughput/processing agreements.
Plains All American Pipeline, L.P.’s 18,300-mile network of oil and natural gas pipelines runs through Alberta (Canada), Colorado, Oklahoma, Texas, Mississippi, Louisiana, and Illinois. On average, the company handles more than six million barrels of crude oil per day.
The company’s infrastructure also includes 140 million barrels of oil or natural gas liquid storage capacity, 200 million barrels per day of NGL fractional/condensate processing, four crude oil marine facilities, more than 2,100 trucks and trailers, and 3,900 NGL rail cars.
Permian Basin Joint Venture
In October 2021, Plains All American Pipeline, L.P. and Oryx Midstream Holdings LLC completed the formation of a Permian Basin joint venture. Plains All American owns the biggest stake, at 65%. The joint venture provides Plains All American Pipeline with numerous benefits:
- Near-term free cash flow accretive to both companies
- 5,500 pipeline miles
- Approximately 6.8 million barrels per day of pipeline system capacity
- Direct downstream connections to all major intra-basin and downstream markets
- 30-year+ average inventory life at current activity levels
- Estimated $50.0 million in operational, cost, and capital synergies on a run-rate basis within 12 months (and the potential to increase that to more than $100.0 million longer-term)
- Additional upside potential related to production growth
(Source: “Plains All American and Oryx Midstream Complete Formation of Permian Basin Joint Venture,” GlobeNewswire, October 5, 2021.)
The joint venture, coupled with long-term minimum volume contracts, leasing, and throughput/processing agreements, will provide Plains All American Pipeline with reliable, predictable cash flow, which it will likely pass on to shareholders as dividends.
Plains All American Pipeline Stock’s Dividend Raised by 21%
As noted above, oil demand is fairly consistent, but it was hobbled during the 2008/2009 financial crisis and the COVID-19 pandemic.
In May 2020, during the pandemic, Plains All American Pipeline cut its quarterly distribution from $0.36 to $0.18 per share. That wasn’t a big surprise, since the demand for oil almost evaporated, with oil tankers being used as floating storage containers. (Source: “Quarterly Distributions,” Plains All American Pipeline, L.P., last accessed June 30, 2022.)
Fast-forward two years and, thanks to higher oil demand and prices, Plains All American Pipeline has begun to raise its quarterly payouts. In May 2022, the company increased PAA stock’s quarterly dividend from $0.18 to $0.2175. At the current price of Plains All American Pipeline stock, that represents a yield of 8.6%.
The big increase came on the heels of outstanding first-quarter revenue that topped Plains All American Pipeline’s previous guidance and allowed the company to increase its 2022 adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) guidance. (Source: “Plains All American Reports First-Quarter 2022 Results,” Plains All American Pipeline, L.P., May 4, 2022.)
The company’s first-quarter revenue went up by 63% year-over-year to $13.7 billion. Its net income, however, went down by 56% year-over-year to $187.0 million, or $0.19 per share. Its net cash went down by 57% year-over-year to $340.0 million.
Despite the decrease in its cash, Plains All American Pipeline, L.P. hiked its quarterly dividend and repurchased $52.0 million worth of its own shares during the first quarter.
“Our business is off to a positive start in 2022, supported by constructive, long-term fundamentals and a strong commodity price environment,” stated Willie Chiang, the company’s chairman and CEO. He added, “We delivered strong first-quarter results above our previous expectations and increased our 2022 Adjusted EBITDA guidance by $75 million to $2.275 billion, with a bias to the upside.”
Plains All American Pipeline, L.P.’s fabulous results and ultra-high-yield dividends haven’t translated into big near-term share-price gains (although PAA stock has been doing better than the broader market). As of this writing, Plains All American Pipeline stock is:
- Down by 13% over the last month
- Down by nine percent over the last three months
- Up by eight percent over the last six months
- Up by six percent year-to-date
- Down by 10% year-over-year
Despite the recent dip in the price of PAA stock, its outlook is bullish. Analysts have provided a 12-month share-price target range of $13.88 to $16.00, which points to potential gains in the range of 40% to 62%.
The Lowdown on Plains All American Pipeline, L.P.
Plains All American Pipeline, L.P. is a company with one of the most enviable infrastructures in the oil and gas industry. The industry’s long-term fundamentals and current global events are helping support high commodity prices and juice the company’s revenue.
While Plains All American Pipeline’s cash flow was down in the first quarter, management said its integrated business model and asset base—which are critical for meeting global energy demand—position the company to “generate significant multi-year Free Cash Flow and maximize unitholder returns for years to come.” (Source: Ibid.)
All this bodes well for Plains All American Pipeline stockholders.
