Plains All American Pipeline, L.P.’s High-Yield Dividend Perfect for Low-Yield Environment?
January 7, 2022
PAA Stock Poised to Reward Investors in 2022
Plains All American Pipeline, L.P. (NYSE:PAA) is a great midstream oil and gas company with critical infrastructure assets strategically positioned to benefit from the global economic recovery. With a dividend yield of 7.3% as of this writing, Plains All American Pipeline stock is a fabulous inflation-busting stock for income-starved investors. And it looks like its payout will get even better in 2022.
Structured as a master limited partnership, Plains All American Pipeline is one of the largest independent midstream energy companies in North America. (Source: “Investor Presentation: November 2021,” Plains All American Pipeline, L.P., last accessed January 6, 2022.)
Through its subsidiaries, the partnership engages in the transportation, terminaling, storage, and gathering of crude oil and natural gas liquid (NGL) in the U.S. and Canada.
Plains All American Pipeline, L.P. operates through three segments: Transportation, Facilities, and Supply and Logistics.
The Transportation segment ships crude oil and NGL through pipelines, trucks, and barges. This is supported by long-term minimum volume commitments and acreage dedications. The Facilities segment provides storage, terminaling, and throughput services. They’re supported by leased capacity and throughput/processing agreements.
The company’s infrastructure includes 18,000 pipeline miles, 140 million barrels of oil or natural gas liquid storage capacity, 340 million barrels per day of NGL fractional/condensate processing, and more than 260 million barrels per day of rail loading capacity.
On average, Plains All American Pipeline, L.P. handles more than five million barrels of crude oil and natural gas liquids per day.
Thanks to the partnership’s long-term minimum volume, leasing, and throughput/processing agreements, it’s able to generate predictable cash flow, which helps it provide investors with reliable, high-yield dividends.
Plains All American Pipeline Stock Increasing Distributions in 2022
In early 2020, around the start of the COVID-19 pandemic, PAA stock’s price cratered by more than 80%. In May of that year, management wisely reduced the dividend from $0.36 to $0.18 per share. (Source: “Quarterly Distributions,” Plains All American Pipeline, L.P., last accessed January 6, 2022.)
Since hitting its March 2020 low, Plains All American Pipeline stock has more than tripled. PAA stock still needs to climb by an additional 75% to get to its pre-COVID-19 level. And its quarterly dividend, which currently stands at $0.18 per unit, needs to climb by 100% to get to its pre-pandemic level of $0.36 per unit.
There’s every reason to believe Plains All American Pipeline stock’s dividend will get there.
For the third quarter of 2021, the company reported adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $519.0 million. Management maintained their full-year 2021 adjusted EBITDA guidance of approximately $2.2 billion. (Source: “3Q 2021
Earnings Package,” Plains All American Pipeline, L.P., November 2, 2021.)
The partnership’s implied distributable cash flow in the third quarter was $0.48 per share, which was more than enough to cover its quarterly payout of $0.18 per share. Management increased their full-year 2021 free cash flow (FCF) after distributions guidance by $50.0 million to about $1.4 billion.
Plains All American Pipeline, L.P. reduced its total debt by $650.0 million in the third quarter of 2021 and by approximately $1.0 billion since the end of 2020. The company also repurchased $64.0 million of its common units in the third quarter, adding up to $167.0 million since the November 2020 authorization.
In 2021, the partnership allocated more than 75% of its FCF after distributions to debt reductions and up to 25% of its FCF to share buybacks. For 2022, it’s shifting the allocation, increasing the amount of cash returned to PAA stockholders (through share repurchases and dividend increases) as leverage decreases.
Chart courtesy of StockCharts.com
Permian Basin Joint Venture to Maximize FCF
There’s even more reason to be optimistic about the likelihood of long-term dividend hikes from Plains All American Pipeline stock.
In October 2021, Plains All American Pipeline and Oryx Midstream Holdings LLC completed the formation of their Permian Basin joint venture (JV), of which Plains All American Pipeline owns the biggest stake: 65%. (Source: “Plains All American and Oryx Midstream Complete Formation of Permian Basin Joint Venture,” Plains All American Pipeline, L.P., October 5, 2021.)
The JV provides Plains All American Pipeline with numerous benefits:
- Near-term FCF accretive to both companies
- 5,500 pipeline miles
- Approximately 6.8 million barrels per day of pipeline system multi-segment capacity
- Direct downstream connections to all major intra-basin and downstream markets
- One million dedicated system acres, including supply and facility dedications
- Seven-year weighted average remaining contract tenor
- At least 30 years of average inventory life at current activity levels
- Expectation to capture about $50.0 million in operational, cost, and capital synergies on a run-rate basis within 12 months, with a potential increase to at least $100.0 million longer-term
- Additional upside related to expected Permian production growth
Willie Chiang, Plains All American Pipeline, L.P.’s chairman and CEO, commented, “Structured as a debt-free JV entity through a cashless transaction, this aligns with Plains’ financial and portfolio optimization strategies, is near-term free cash flow accretive to Plains and Oryx and reinforces Plains’ ability to maximize free cash flow for our investors, while enhancing our overall credit profile.” (Source: Ibid.)
The Lowdown on Plains All American Pipeline, L.P.
Plains All American Pipeline, L.P. is a great high-dividend midstream energy company that’s poised to raise its already frothy payout. The partnership delivered stronger-than-expected third-quarter results, increased its full-year FCF guidance, and maintained its full-year adjusted EBITDA guidance despite the impact of non-recurring and timing-related items.
Moreover, the company says it will increase the amount of cash returned to PAA stockholders in 2022. This should pave the way to juicier dividends that even the most discerning income hog would love.
