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Morningstar | Plains Benefits From Wide Differentials, Reports Good Fourth Quarter

Plains reported a good fourth quarter, as it benefited from wide differentials in Canada and the Permian Basin, leading to outperformance once again from its supply and logistics (S&L) segment. Its 2019 guidance generally matches our expectations, and as a result, we plan to maintain our $29.50 fair value estimate and wide moat rating. With leverage now at 3.4 times EBITDA, safely within management's targeted range, and distributable cash flow covering distributions by more than 2 times, we expect a meaningful increase in the distribution next quarter. With the leverage now at a more comfortable level, capital spending plans of $1.1 billion in 2019 are easily supported, which includes Permian investments and the contribution for the large Wink pipeline (Plains is a 20% owner as part of a joint venture with ExxonMobil) that plans to move 1 million bpd from Wink to Texas City. We see the Wink pipeline as an attractive investment that leverages Plains' extensive Permian infrastructure and expect it can deliver healthy returns.

For context, Plain's original expectations for 2018 were for $2.3 billion in adjusted EBITDA with $100 million in contributions from the supply and logistics segment. Actual 2018 EBITDA was $2.7 billion, with $462 million in supply and logistics EBITDA. Plains also benefited from being able to place the Sunrise pipeline expansion in place a few months ahead of schedule, adding 300,000 bpd of takeaway capacity in the constrained Permian. Plain's 2019 guidance is set at $2.75 billion, reflecting 8% year-over-year growth in fee-based EBITDA (11% adjusted for the BridgeTex sale) and $350 million in S&L EBITDA, due to the reduced opportunity to capture large Permian differentials as spreads recently have collapsed. Despite the collapse in Permian differentials, we expect the current takeaway constraints in the Permian will be eased more in the second half of the year, providing more opportunities for Plains to grow its Permian volumes.