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Morningstar | Plains Reports Great 3Q as Supply and Logistics Segment Outperforms

In a market where NGL, oil, and gas differentials have widened, Plains has reaped the whirlwind, with a great third quarter. Still, as we expect differentials to normalize in 2019, and the segment's performance to return to more long-term (lower) assumptions, we're maintaining our $29.50 fair value estimate and wide moat ratings. The entities' fee-based transportation and facilities segments met our expectations after adjusting for asset sales, with EBITDA up 12% and down 1% from last year, respectively. Volumes benefited from higher Permian Basin production, in our view, which will continue to be a key driver for Plains in the near and medium term. Overall adjusted EBITDA increased 30% from last year to $636 million.

The outperformance came from the supply and logistics segment, which generated $75 million in adjusted EBITDA up from a loss of more than $50 million last year. Plains' guidance increases for 2018 to $2.55 billion is above our expected $2.4 billion, with the entire increase coming from a higher expected contribution from supply and logistics. Last quarter, the expectation by Plains is that the segment would contribute $175 million in EBITDA for the year versus our expectations of $181 million, and now it is $350 million. For reference, this translates into EBITDA per barrel of about 75 cents for the year versus our long-term expectations of 53 cents per barrel. At its peak, the segment earned over $2 a barrel in 2012 and 2013. Differentials have blown out in the Permian due to a lack of pipeline capacity and given Plains' asset base is dominant in the region, it's not surprising that they've found a number of opportunities to extract marketing profits as well as investment opportunities to debottleneck capacity. We expect the lack of pipeline capacity to be resolved more in the second half of 2019 as new capacity comes online.

Plains also closed the sale of its 30% interest in BridgeTex during the quarter, generating proceeds of $862 million. With 2018 capital spending plans staying flat at $1.95 billion from last quarter, this suggests the capital will be used to reduce debt in the coming quarters, or Plains will boost its 2019 spending plans. We're inclined to propose Plains use the proceeds for both efforts. In addition, with a coverage ratio of 1.93 times for the quarter, it can also use the retained cash to help fund its capital expansion efforts too, while potentially even increasing the distribution. We think there's considerable scope for Plains to put capital to work in this type of environment.