Plains All American Pipeline: A New Era of Distribution Growth (NASDAQ: PAA)

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introduction

After five painful years with three separate distribution cuts, the prospects for a return to distribution growth were finally looking up for Plains All American Pipeline. (NASDAQ: PAA) at the end of 2021, as my previous article talked about. Fortunately, their management recently announced their intention to increase their distributions which, if approved by the Board of Directors, should bring their distribution yield to 8.05%. This article provides a follow-up analysis that reviews their subsequently released fourth quarter 2021 results and, more importantly, their guidance for 2022 which now excitingly sees a new era of distribution growth begin.

Executive summary and ratings

Since many readers are likely short on time, the table below provides a very brief summary and scores for the main criteria assessed. This Google document provides a list of all my equivalent ratings as well as more information about my rating system. The following section provides a detailed analysis for readers wishing to delve deeper into their situation.

Plains All American Pipeline Ratings

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*Instead of simply assessing distribution coverage through distributable cash flow, I prefer to use free cash flow as it provides the strictest criteria and also best captures the true impact on their financial position.

Detailed analysis

Plains All American Pipeline Cash Flow

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Now that 2021 is in the rearview mirror, it shows that their cash flow performance continued to recover throughout the fourth quarter of 2021 and ultimately ended the year at $1.996 billion, which is an increase a very impressive 31.84% year-over-year from their previous result of $1.514 billion in 2020. This actually marks a very surprising improvement from the lackluster early 2021 outlook that has been discussed in my other article that their operating cash flow was expected to suffer in 2021 compared to 2020 due to their initial guidance for the The former see their adjusted EBITDA at just $2.15 billion, which would have been in down 16.01% year-over-year from their 2020 earnings of $2.56 billion, according to slide 9 of their fourth quarter 2020 earnings presentation.

Thanks to their considerably lower capital expenditure, they eventually produced enough free cash flow to completely cover their distribution payments for the first year of their life and in fact it actually landed at 269.05% and has therefore provided very strong coverage and therefore well above their very low 15.73% to 52.49% coverage throughout 2018-2020. When looking at their forecast for 2022, thankfully, this fundamental shift looks set to continue, albeit with a slight negative caveat, as shown in the chart below.

Plains All US Pipeline 2022 Directions

Plains All American Pipeline Fourth Quarter 2021 Results Presentation

Looking at their forecast for cash flow performance for 2022, it shows that they expect their cash flow from operations to increase to around $2.1 billion, which is a modest increase of around 5% d year-over-year versus 2021. While positive, the slight negative caveat relates to their distributions to non-controlling interests, which are expected to increase significantly from next to nothing in 2021 to several hundred million dollars. , based on their approximate relative scale to other known variables, as no exact indication appears to have been provided. These appear to be occurring due to management’s reorganization of their business segments into “Crude Oil” and “NGL” from their previous three business segments which were “Transportation”, “Facilities” and ” supply and logistics”, thus affecting the way various joint ventures are presented in their financial statements, in accordance with the comments of management included below.

“To open my part of the call, I will share some comments on our new crude oil and NGL reporting segments as well as the treatment of noncontrolling interests in our reporting. Our new segments reflect how we collect and manage our integrated crude oil and NGL systems, aggregating producer supply, meeting end-market demand and all stages in between.We believe the new segments will provide greater visibility and transparency into the drivers of our overall activity and reduce intersectoral activity.

– Plains All American Pipeline Q4 2021 Conference Call.

Their management then discussed various details relating to this subject during their Q4 2021 earnings conference call which readers can review for themselves if interested, as they would be unnecessarily long to include in this article. At the end of the day, the exact accounting principles behind the scenes are not necessarily of the utmost importance to investors, but the bottom line implications are more significant and, simply put, these distributions to non-controlling interests weigh down actual operating cash flow. attributable to their unitholders.

This means that while their cash flow from operations is expected to increase by around 5% year-over-year in 2022, after removing these estimated distributions to non-controlling interests, it effectively only becomes ‘about $1.9 billion and so in practice, would be down about 5% year-over-year. While they’re less than stellar, they should at least have enough free cash flow to cover their distribution payments, because even after subtracting their net capital expenditure forecast of $485 million, there’s still about $1.4 billion or more accurately, it leaves about $1.2 billion in estimated free cash flow for 2022 after subtracting their preferred distributions of $198 million per year. Given that their distribution payouts were only $517 million in 2021, this should obviously not only see their very strong coverage continue into 2022 at over 200%, but also provide the ability to easily fund their higher distributions to come, per management commentary included below. .

“Based on the progress we have made to date and our expectation to generate significant cash flow over the next several years, we intend to recommend to our Board of Directors an increase in our annualized distribution of $0.15 per common unit, which, based on our advice, maintains the ability for continued discretionary redemption activity.

– Plains All American Pipeline Q4 2021 Conference Call (previously linked).

Although it remains technically possible that their board of directors will not approve the higher distributions, this seems very unlikely in my opinion given that an exact amount has already been made public. If their annual distributions increase by $0.15 per unit, that would represent a very solid 20.83% increase over their current annual distributions of $0.72 per unit. This obviously won’t significantly subtract their distribution coverage because at over 200% this could theoretically handle doubling their distributions and so even if their cash performance never increases in future years there is still prospects of seeing further distribution growth in the coming years. year.

Plains All American Pipeline Capital Structure

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Thanks to the continued recovery of their cash performance during the fourth quarter of 2021, their net debt continued to decline and ended the year at $8.771 billion, which is down from its previous level of $9.005 billion at the end of the third quarter and therefore now sees a solid 13.93% year-over-year decline from its level of $10.191 billion at the end of 2020. Regarding Looking ahead, their previously discussed 2022 guidance also indicates that approximately 75% of their $700 million free cash flow after distribution payments and divestments will be directed towards deleveraging, which amounts to approximately $525 million. dollars and so 2022 should see a decent decrease of around 6% YoY from the end of 2021.

Plains All American Pipeline Leverage Ratios

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After seeing their net debt decrease throughout the fourth quarter of 2021, it was natural to see their debt decrease alongside their net debt to EBITDA and net debt to operating cash flow s now standing at 3.83 and 4.39 respectively, down from their previous results at the end of the third quarter of 4.26 and 4.73 respectively. If they are still in the high zone between 3.51 and 5.00, they are at least no longer floating in the very high zone as at the end of 2020 when their respective results were 4.97 and 6.73.

Going forward, their leverage is expected to continue to decline in 2022, though, since their accrual-based earnings guidance for 2022 sees their Adjusted EBITDA at $2.2 billion and therefore essentially flat per compared to their result of $2.196 billion in 2021, this leaves any deleveraging dependent on declining net debt. Since their forecast implies that their net debt will only decrease by around 6% year-on-year in 2022, the difference with their leverage will be comparable. While it’s better to see more deleveraging, their high leverage isn’t necessarily problematic or impede their ability to increase their distributions given the stable nature of the midstream industry, especially with their net debt to EBITDA already in the bottom half. from the high territory.

Looking elsewhere, their liquidity has not changed significantly after the fourth quarter of 2021, with their respective current and cash ratios of 0.98 and 0.07 seeing only a slight improvement from their previous respective results. of 0.90 and 0.04. Naturally, this means that their liquidity is still adequate and so given the lack of changes, it would be redundant to reassess this aspect in detail, but if new readers are interested, please refer to my previously linked first article.

Plains All US Pipeline Liquidity Ratios

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Conclusion

While their mostly flat forecast for 2022 is anything but groundbreaking or stellar, thankfully they still see their payouts increase by just over 20% while deleveraging slightly more. This is still a desirable combination for income investors and so with their distributions entering a new era of growth thanks to their very high coverage, it is no surprise that I think maintaining my buy rating is appropriate.

Notes: Unless otherwise noted, all figures in this article are taken from Plains All American Pipeline’s SEC Filingsall calculated figures were performed by the author.

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