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Morningstar | Plains Meets Expectations in 1Q; Raises 2019 Guidance Modestly Due to Unsustainable S&L Performance

Plains reported first-quarter results that largely met our expectations, and we plan to maintain our $29.50 fair value estimate and wide moat rating. Plains bumped up its 2019 adjusted EBITDA guidance by $100 million, to $2.85 billion, with the entirety of the outperformance due to the supply and logistics segment, which is taking advantage of regional differentials in the natural gas liquids and crude oil businesses. We agree with Plains that this type of performance is unsustainable, as S&L EBITDA is expected to reach $450 million this year, up from just $60 million in 2017, where spreads where compressed to well below midcycle levels.

However, Plains has learned from its mistakes during the last cyclical highs of the S&L segment, where EBITDA reached nearly $900 million in 2013. At the time, Plains leveraged up to invest in new projects and increase distributions only to be forced into deleveraging, asset sales, and ultimately a 50%-plus distribution cut a few years later as S&L performance declined to below management's expectations of normalized performance levels at the time. Now, Plains is smartly using the S&L EBITDA to reduce debt and fund capital projects without issuing equity and has excluded it from distribution contributions. Even with debt/EBITDA at 3.1 times this quarter, below Plains' newly lowered 3.25 times target, Plains was quick to point out that leverage would need to be reduced further to account for more normalized S&L performance. One longer-term outcome that sounds reasonably attractive would be to use excess S&L contributions to repurchase undervalued Plains stock.

Aside from the S&L performance, we continue to be impressed by Plains' ability to opportunistically source projects in the Permian. Plains originally estimated 2019 capital spending at $650 million in August 2018, upped it to $1.1 billion in February 2019, and increased it again this quarter to $1.35 billion. A good chunk of the incremental $250 million in capital will be devoted to expanding the St. James storage hub by 2.4 million barrels, taking Plains' total capacity at this strategic Gulf Coast storage hub to more than 15 million barrels. The other new major project is the Wink-to-Webster pipeline, which plans to move more than 1 million barrels per day (max capacity is about 1.5 million b/d) from the Permian to the Gulf Coast as part of a joint venture with ExxonMobil and Lotus Midstream. This pipeline now also has the ability to consolidate shippers from the Permian Gulf Coast pipeline, which was recently canceled due to lack of shipper interest. Wink also holds the potential to become a Permian market hub for the different grades of Permian West Texas Intermediate and condensate, likely affording Plains more opportunities to capture fees via marketing, storage, and pipeline batching opportunities.