Since its initial public offering on Nov. 17, 1998, Plains All American Pipeline (NYSE: PAA) has had one of the most impressive track records in the MLP sector. The partnership’s IPO gave it an initial market capitalization of $291 million, which today is worth $14.1 billion. Its performance since its IPO towers above that of the S&P 500 and even the NASDAQ:


PAA owns a diversified portfolio of assets from coast to coast and border to border, and it covers most of the important energy-producing areas of the US and Canada. The company operates nearly 19,000 miles of crude oil, natural gas liquids (NGLs) and refined product pipelines and moves over 4.2 million barrels of liquid product per day. The primary focus is on crude oil, but assets include:

• 125 million barrels of liquids storage
• 97 billion cubic feet of natural gas storage capacity
• 236,000 barrels per day of fractionation capacity
• 11 processing plants
• 1 isomerization unit
• 26 crude oil and NGL rail terminals

Over the past decade, PAA has established itself as one of the country’s top MLPs. So, when PAA CEO Greg Armstrong speaks, people listen.

But MLP investors didn’t like what he had to say last week following the release of PAA’s second-quarter earnings. Armstrong indicated on PAA’s earnings call that the outlook for the sector has worsened over the past two months:

“Over the roughly 60 days since our annual Investor Day, crude oil prices have declined at one point by nearly 25%, falling from roughly $60 per barrel to $45 per barrel, and yesterday WTI was trading in the $45 to $46 per barrel range.

Midstream equity valuations have also traded down over that time period, with the Alerian MLP Index currently trading approximately 13% below its level in early June, and access to equity markets has appeared to become more challenging. Through July 1 of this year, the midstream MLP sector completed 26 equity offerings, including IPOs, raising over $8.4 billion. Recently the pace has slowed considerably with only two midstream offerings since July 1, raising just over $700 million.”

Until the summer slump, midstream competitors retained easy access to capital, Armstrong said. That, combined with lower oil prices, has resulted in more takeaway capacity being built out in the near term than PAA had initially forecast, according to the CEO. As a result, PAA lowered its target distribution growth target for 2015 from 7% to 6%, and even then its cash flow is only projected to cover 93% of the annual distribution. Armstrong then indicated that PAA — which has raised its distribution every quarter since April 2009 — may need to defer distribution growth in the near future:

“If current conditions remain challenging into early 2016, among the options we will need to consider is whether to view 2016 as a transition year with much lower distribution growth or as a year to defer any distribution growth until 2017, when coverage increases as a result of meaningfully higher EBITDA levels related to our various growth projects”

The market reaction to Armstrong’s comments was swift and brutal. PAA’s unit price declined 16% before the earnings call had concluded. It’s now down about 40% over the past year. Investors sold off PAA general partner Plains GP Holdings (NYSE: PAGP) as well, sending units down a whopping 31% for the week.

Armstrong’s comments had a big impact on the broader MLP market as well, helping to send the Alerian MLP Index (AMZ) down nearly 10% for the week.

Some were not happy with Armstrong’s comments. When Energy Transfer Equity (NYSE: ETE) CEO Kelcy Warren was asked about the infrastructure overbuild remarks on his conference call, he suggested it was a normal part of the business cycle.

“But I’ll tell you, people that give guidance and then turn around and have a bad financial reporting period and then throw all of us under the bus: ‘Hey, by the way, don’t focus on us, focus on the industry. This is an industry problem.’ That gets a little frustrating for me.”

It’s been a very frustrating year in energy.

(Follow Robert Rapier on Twitter, LinkedIn, or Facebook.)

Portfolio Update

Nobody’s All American  

Investors’ reaction to the distribution warning from Plains All American likely had at least as much to do with the currently soured industry sentiment as with PAA-specific issues. If the worse thing that can happen in the current environment is that an investment-grade master limited partnership won’t increase a distribution currently yielding 7.5% next year before resuming growth in 2017, that doesn’t sound so bad.

But there’s no getting around the fact that Plains is particularly exposed to low oil prices as a shipper deriving the bulk of its profits from the transport of North American crude, So while its units and those of its general partner Plains GP Holding are now trading at levels that should prove lucrative in the long haul, the shorter run looks rockier.

PAA remains a Conservative Portfolio buy below $58, and PAGP a buy below $30 in the Growth Portfolio. But we certainly dont expect these limits to be reached any time soon.

Despite the heavy discounting, neither security made our recently updated Best Buys list. And if we were only looking out six months or so, both would be rated Hold rather than Buy by now.   

— Igor Greenwald