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Morningstar | Plains Completes Deleveraging Plan, Announces 20% Distribution Increase; Remains Undervalued

Plains has announced a number of updates to its financial goals, which generally align with our expectations. Broadly, the plan to lower leverage to a midpoint of 3.25 times debt/EBITDA and retain excess distributions to fund capital spending plans without issuing equity makes sense to us. We plan to maintain our $29.50 fair value estimate and wide moat rating. In our view, Plains continues to be undervalued as investors underappreciate the earnings power of its Permian assets, where we expect strong production growth in the coming years. Plains now has ample financial flexibility to take advantage of any opportunities as they arise. The one area that Plans did not comment on was its dual share classes, as many midstream firms have been consolidating the general partner and limited partner into a single entity to address investor preferences.

As we anticipated, Plains announced that its 2017 deleveraging goals were complete, as it ended 2018 with a debt/EBITDA ratio of 3.4 times, below its 3.5-4.0 times target. It had reduced debt by over $2 billion since late 2017. Plains' new target is a midpoint of 3.25 times debt/EBITDA, and it plans at minimum a coverage ratio of 1.3 times to fund capital spending plans without issuing equity. The distribution will be immediately increased 20% to an annualized $1.44 per share and is expected to increase around 5% annually going forward. The distribution increase also was in line with our expectations, and we believe this is easily supportable, as the coverage ratio will be closer to 1.4-1.5 times (excluding any contributions from the supply and logistics segment) at this growth rate. In turn, the excess coverage will allow for plenty of cash to be used to reduce leverage further and deploy toward incremental growth projects.

Plains' Permian barrels will be a key source for higher U.S. oil exports in the coming years. For more on our oil export forecast, please see our research published in February 2019, "The U.S. Crude Oil Export Boom and Midstream Opportunity."