Plains All American Pipeline LP (NYSE: PAA) owns a diversified portfolio of assets covering most of the important energy-producing areas of the US and Canada. The company operates 18,000 miles of crude oil, natural gas liquids (NGLs) and refined product pipelines and moves approximately 3.5 million barrels of liquid product per day. The primary focus is on crude oil, but assets include:

•    74 million barrels of crude oil and refined products capacity

•    22 million barrels of NGL/LPG storage capacity

•    93 billion cubic feet of natural gas storage working capacity

•    7 fractionation plants

•    11 processing plants

•    1 isomerization unit

•    23 crude oil and NGL rail terminals

PAA’s thesis is that under current conditions, refinery configurations will eventually be unable to accommodate projected levels of incremental light sweet crude production in the US. This could create a production bottleneck unless refineries are reconfigured. In a June 2013 presentation, PAA Executive Vice President John Rutherford identified potential solutions:

Potential Upstream/Downstream Solutions:

• Increased usage of condensate by petrochemical companies

• Refiners modify to accommodate more light sweet crude

• May require commitments to lock-in crude supply at discount

• Reduce rate of drilling to allow declines to reduce supply

• Presidential permission to export light sweet crude

• Shut in producing wells until wellhead price recovers

Potential Midstream Solutions:

• Increased long-haul shipments of condensate to Canada as diluent

• Rail, barge, truck, and/or new pipelines to regions not yet out of balance

• Absorbing some light crude by blending with heavy crudes

• Installation of condensate splitters to qualify for export status

Rutherford argues that PAA is well-positioned to benefit from these market developments. Specifically, the partnership has the right infrastructure in the right locations to move crude oil to where it is most needed.

The partnership’s history shows a strong track record of being in the right place at the right time. PAA had its IPO on Nov. 17, 1998 at an initial market capitalization of $291 million. Today, the partnership’s market capitalization stands at $18.1 billion. In the most recent 10-year period, the average annual return of PAA units was 22.9 percent.

PAA’s $7 billion project portfolio consists of more than 200 projects. Of that total, projects worth $2.1 billion have been approved, including $1.4 billion from the 2013 capital program.

The partnership has generated $7.6 billion of distributable cash flow (DCF) over the past nine years, paying out just short of three quarters of that total and reinvesting the rest. The long-term distribution coverage checks in at a prudent 134 percent.

Source: Credit Suisse MLP and Energy Logistics Conference, June 26, 2013.

The partnership expects 2013 cash flow to be 65 percent fee-based and 35 percent margin-based. Among the fee-based businesses are pipelines, storage tanks and processing plants, while margin-based assets include 800 trucks, 925 trailers and 5,400 railcars.

The price of units has pulled back in recent months. In the most recent quarter, PAA’s adjusted EBITDA fell 8 percent from a year ago as competition from railroads cut into its logistics business. The Supply and Logistics segment declined 30 percent. PAA’s fee-based businesses actually grew 7 percent year-over-year.

PAA has an enterprise value of $25 billion and an Enterprise Value/EBITDA (ttm) of 10.9. Debt stands at a reasonable 3.3 times trailing Ebitda.

The units presently yield 4.5 percent, and the distributions have increased in 34 of the past 36 quarters. The most recent quarter marked the 46th consecutive period in which PAA has delivered on its forecast.

At 38.5 percent of debt to assets, PAA has one of the least leveraged balance sheets among the pipeline MLPs. This minimizes the risk of rising interest rates cutting into future distributions. Given the solid project portfolio, the recent 10 percent pullback in unit price and a long-term return for unitholders that trails only Kinder Morgan Energy Partners LP (NYSE: KMP) among the major midstream MLPs, PAA units are a solid store of value.

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Portfolio Update

Time to Punt PVR

PVR Partners (NYSE: PVR) is in many ways everything Plains All-American is not: a secondary player heavily dependent on the growth plans of its much larger unaffiliated customers, heavily leveraged as a result of recent acquisitions and thus far unable to deliver the promised results.

In downgrading this portfolio holdover to a Hold after last month’s disappointing quarterly report and profit warning, we warned that a Sell recommendation would soon follow. And since the unit price continues to grind lower the time to cut and run has arrived — while PV seems overdue for a short-term bounce, it also remains vulnerable to even steeper declines.

Debt inflated to more than 6 times Ebitda will constrain long-term growth opportunities, and pinch cash flow as rates and refinancing costs rise. And soon the units issued to pay for past acquisitions will become eligible for distributions, adding to the strain on subpar coverage. Sell PVR and don’t look back.

— Igor Greenwald