Plains All American Pipeline (PAA) is in the midst of a series of major acquisitions which could turn it into the number one crude oil company in North America. With a stock price that has risen sharply since October 2011, the question on investor’s minds should be: Is now a good time to invest with Plains All American Pipeline or has that ship already sailed too far out of the harbor?
Plains All American Pipeline (PAA) is involved in the transportation, terminalling, storage, and marketing of refined products, crude oil, and liquefied petroleum gas and other natural gas petroleum products (together “LPG”). Plains All American Pipeline also engages in the development and operation of natural gas storage facilities through its majority equity position of general partner PAA Natural Gas Storage (PNG). (http://www.paalp.com/Our-Company/Overview-1643.html)
The company is vitally involved in the transportation of North American energy supplies and handles an average of more than 3 million barrels of crude oil, refined products and LPG per day. With headquarters in Houston, Texas, Plains All American Pipeline also holds a diversified portfolio of assets in key North American locations.
The vision of the company is to be the leader in crude oil and refined product transportation and marketing in Canada and the United States by addressing regional supply and demand imbalances. Plains All American Pipeline plans to combine location of services with product expertise to provide value to customers and deliver superior returns to investors.
The company’s direct competitors are Enterprise Products Partners (EPD) and Sunoco Logistics Partners (SXL). The main advantage that Plains All American Pipeline has over its competitors is integration of physical assets with supply activities. The company has strategic plans to acquire assets in new regions in order to grow, expand and improve service. (http://quicktake.morningstar.com/s/stock/analysis.aspx?t=PAA#)
Plains All American Pipeline is a master limited partnership (MLP) meaning that it makes quarterly distributions of cash to shareholders. Distributions have increased by 121% since 1998, with current annual distributions at $3.98 per unit. The goal of the company is to grow internally and through acquisitions in order to increase distributions.
These acquisition efforts are well underway. In the most recent conference call, it was confirmed that Plains All American Pipeline had closed two acquisitions and signed agreements for three more, at a total cost of approximately $2.3 billion. The largest transaction was the purchase of BP’s Canadian LPG and NGL business, expected to close in the first or second quarter of 2012. Two smaller transactions were expected to close late December or early 2012. These acquisitions were essentially pre-financed and PAA retains significant liquidity. Over the next 24 months PAA plans to invest $200 million to place these assets into service, expand capacity and convert functionality.(http://www.b2i.us/Profiles/Investor/Investor.asp?BzID=789&from=du&ID=59457&myID=1031&L=I&Validate=3&I= )
In late October Plains All American Pipeline closed an acquisition of trucking operation Velocity South Texas Gathering. The Gardendale Gathering System (a large crude oil gathering and pipeline system) is a fee-for-service business with long-term contracts. PAA plans to expand capacity in the area and invest between $450 and $500 million in total for purchase and expansion of this acquisition.
On December 9th, 2011 Plains All American Pipeline completed agreements with Western Refining for purchase of 6.6 million barrels of storage capacity at Western’s Yorktown Virginia refinery site and a 16-inch, 8.2 mile segment of New Mexico pipeline. Improvements, upgrades and expanded use are planned for both projects. (http://www.b2i.us/profiles/investor/ResLibrary2.asp?BzID=789&GoTopage=&Category=117&t=&g=)
In early December Plains All American Pipeline signed a definitive agreement to purchase all of BP’s Canadian-based LPG business including related assets in the U.S. Midwest at a total price of $1.67 billion. It is anticipated the acquisition will close in the first or second quarter of 2012. This acquisition will significantly increase Plains All American Pipeline’s existing LPG assets and activities and provide a supply-driven platform to complement the company’s existing wholesale business based on demand.
This combination will make Plains All American Pipeline one of the largest NGL providers in North America and is an asset-rich transaction including pipelines, storage, and processing facilities across Canada and the U.S. Midwest. Plains All American Pipeline has financed these acquisitions sensibly and maintained liquidity through pre-funding sources such as an equity offering, liquidation of unencumbered equity, short-term debt for seasonal inventory and long term debt.
On January 10th, 2012, Plains All American Pipeline announced quarterly distributions $1.025 per unit, amounting to an increase of 7% over the distribution one year ago. Plains All American Pipeline’s distributions have increased 29 out of the last 31 quarters. On a negative note, because Plains All American Pipeline must pay out a significant percentage of cash flow each year, they depend on external funding for growth and acquisitions and the inherent risk that comes with significant funding sources. (http://quicktake.morningstar.com/s/stock/analysis.aspx?t=PAA#)
Plains All American Pipeline stock has gained steadily since October 2011, with an increase of approximately 40% during that time period. The relative strength index (RSI) has also risen steadily since then indicating the stock may be currently overbought. On a positive note, the stock currently has a healthy P/E ratio of 17.95. (http://www.marketwatch.com/investing/stock/paa)
Plains All American Pipeline is planning to release 2011 fourth-quarter results and full-year financials on February 8th, 2012 and host a conference call on February 9th.