PAA Plains All American Pipeline

Plains All American Pipeline, L.P. (PAA) announced first-quarter 2012 operating earnings of $1.58 per unit, ahead of the Zacks Consensus Estimate of $1.40 per unit. The results of the partnership were also substantially higher than earnings of $1.03 per unit reported in the year-ago quarter.

The strong earnings outperformance was attributable to favorable growth executed by each of the partnership’s segments.

On a GAAP basis, Plains reported earnings of $1.02 per unit compared with 90 cents per unit in the prior-year quarter. The difference of 56 cents between operating and GAAP earnings was during certain one-time items. This includes a $59 million loss on derivative activities, $26 million related to equity compensation expenses, an expense of $4 million related to acquisitions related expenses and $1 million for certain other items.

Total Revenue

Overall revenue at Plains All American Pipeline at the end of the first quarter was $9.2 billion versus $7.6 billion in the year-ago period, reflecting growth of 21.0%. Reported quarter revenue comfortably surpassed the Zacks Consensus Estimate of $8.2 billion.

Revenue grew on account of higher average volumes from Transportation and Facilities, which constituted combined growth of 23.5%.

Segment Update

Transportation: Volumes from transportation activities posted an upsurge of 5.4% to 3,166 thousand barrels per day with operation in Basin Systems being the major contributor (15.6% of total average daily volumes). Adjusted profit during the quarter rose sharply by 21% year over year. The main driver of this profit expansion was higher pipeline tariffs, volumes and loss allowance revenue.

Facilities: Adjusted profit at the segment climbed 15% year over year. The growth was due to capacity expansion from organic capital projects which were completed recently. Acquisitions at Southern Pines and Yorktown also added to the revenue increase.

Supply & Logistics: Profit shot up 68% in the reported quarter. The growth resulted from increased crude oil lease gathering volumes and margins related to significant production escalation of crude oil in the U.S. and Canada.

Operational Update

Total cost and expenses during the quarter increased by 20.1% year over year to $8,905.0 million. The combined effect of rise in purchases and field operating cost was responsible for this hike in expenses.

In the current quarter, adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) rose to $382.0 million from $326.0 million reported in the prior year. This was mainly driven by higher-than-estimated pipeline volumes and solid performance during strong market conditions.

The positive effect from the revenue surge mitigated the rise in total costs thereby boosting the operating margin of the partnership in the current quarter. Operating income increased by 9.8% to $313.0 million at the end of the first quarter.

Financial Screening

Cash from operating activities during the quarter was $317.0 million versus $654.0 million in the prior-year quarter. During the quarter the partnership had adequate cash on hand for the $1.67 billion acquisition of the Canadian natural gas liquids business from BP Plc (BP).

Long-term debt of the partnership as of March 31, 2012, was $5.8 billion versus $4.5 billion as of December 31, 2011.

Cash Distribution

The new quarterly distribution rate of the partnership is $1.045 per unit ($4.18 per unit on an annualized basis) payable May 15, 2012. The new distribution rate reflects quarterly growth of 2.0% and year-over-year rise of 7.7%.

The partnership expects to benefit from strong industry performances in 2012. It affirmed its distribution rate increase target of 8% to 9% in 2012.

Guidance 2012

Plains made an upward revision to its organic capital growth program by $150 million to $1 billion. The partnership has also increased the mid-point of their annual adjusted EBITDA estimate by $150 million on the back of a significant performance in the first quarter of 2012.

Peer Comparison

Enterprise Products Partners LP (EPD), which competes with Plains All American Pipeline L.P., reported first quarter 2012 earnings per limited unit (excluding special items) of 62 cents, which surpassed the Zacks Consensus Estimate of 59 cents and grew nearly 27% from 49 cents a year ago.

Revenues in the quarter increased nearly 11% year over year to $11,252.5 million but failed to meet the Zacks Consensus Estimate of $11,498 million.

Our View

Plains provided a stellar performance with both earnings and revenue breezing past the corresponding Zacks Consensus Estimates in the first quarter.

The partnership’s continuous thrust towards acquisitions, infrastructural expansion and a consistent balance sheet also add to its growth portfolio. We believe positive outcome from these factors will enable the partnership to comfortably achieve its set targets during 2012.

Plains All American Pipeline currently retains a Zacks #1 Rank, which translates into a short-term Strong Buy rating. We have an Outperform rating for the partnership in the long run.

Houston, Texas-based Plains All American Pipeline owns assets strategically located in well-established oil producing regions, catering to major U.S. refinery and distribution markets. Other than organic growth opportunities, the partnership also relies on acquisitions to spur growth.

 
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