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Morningstar | Plains Benefits From Wider Permian and Canadian Differentials; Raising Fair Value Estimate. See Updated Analyst Note from 08 Aug 2018

The Plains entities reported a strong second quarter and boosted 2018 EBITDA guidance by $100 million to $2.4 billion. Virtually all of the increase is coming from the much-maligned supply and logistics segment, which has struggled in the past few years but is now able to take advantage of wider differentials particularly in the Permian and in Canada. After updating our model, we are raising our fair value estimate to $29.50 from $27 while maintaining our wide moat rating.

As Plains is the dominant midstream entity in the Permian, this is a good environment for the firm, with Permian volumes surging on Plains' assets. Adjusted for divestitures, transportation EBITDA increased 27% to $360 million from last year, while overall EBITDA increased 12% over the same time frame. Plains also announced a $650 million increase (or a 33% increase) in its 2018 and 2019 capital expenditure program to $2.6 billion. These projects are a variety of debottlenecking efforts in the Permian, reflecting additional pumping expansion and accelerating existing projects adding about 800,000 bpd of intra-basin capacity as well as more than 850,000 bpd of long-haul capacity. One key project is the ExxonMobil Plains joint venture for a pipeline that can ship more than 1 million bpd from the Permian to Houston. A final investment decision will be made in the fourth quarter, and if enough customer commitments are obtained, it could be in service in 2021. Supported by both ExxonMobil equity production, ExxonMobil refineries, and aggregated volumes from Plains, it strikes us as a very competitive pipe. We expect about 15% fee-based growth in 2019, putting our revised EBITDA estimate for Plains at about $2.8 billion.

There was no new commentary from Plains management on the possibility of consolidating the two Plains entities. Given its oil focus, Plains is not materially impacted by the recent Federal Energy Regulatory Commission's rule-making effort around the disallowance of a tax allowance. The main reason for this shift would be broadening the pool of potential investors. With the rating agencies moving the outlook to stable from negative, this could be back on management's road map.