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Morningstar | Plains' Dominance in the Permian Basin Continues to Pay Off

Over the past few years, the volatility and collapse in Plains’ supply and logistics business have distracted investors from what we believe to be a wide-moat portfolio of oil pipelines and related assets. To be sure, there are distorted pipeline economics from minimum volume commitment contracts as well as increased capital flowing to the oil logistics space. These changes have caused painful financial implications, as distributions have fallen to $1.20 per unit from over $2.70 a unit and Plains has been forced to deleverage its balance sheet. This restructuring has pushed back distribution growth to the 2019 time frame. However, we believe the returns from the pipeline network, supported by a powerful position in the Permian Basin, which is also the lowest-cost U.S. shale basin, should continue to shine through. The recent simplification transaction, which eliminated IDRs and thus lowered Plains’ cost of capital, should provide additional attractive investment opportunities.The most important driver for Plains going forward will be its Permian asset base, where it transports 3.2 million barrels per day and holds substantial storage and gathering assets. Beyond simple volumetric growth (we expect Permian volumes to nearly double by 2022), we also are optimistic about Plains’ opportunity to segregate volumes based on crude oil gravity and obtain additional fees, as increasingly Permian volumes are at the light end of the spectrum in the 45-55-degree gravity range. Rather than simply include these more valuable lighter volumes in existing flows, Plains can move these more attractive barrels to higher-value destinations, reaping additional fees in the process. Further, as additional U.S. oil volumes are increasingly exported, we believe Plains has built out decent assets at Corpus Christi and the Houston Ship Channel to benefit from this demand driver, as well. Plains has done a great job pivoting in a takeaway-constrained Permian environment, identifying $650 million in incremental debottlenecking projects to undertake while capturing wider Permian differentials through its supply and logistics segment.