Plains All American Pipeline (PAA) Update - Nov 28

[dan_s]

This afternoon I received the following notes from Tom Abrams, one of the rock solid analysts at Morgan Stanley. Tom heads up their midstream team.
The MS team met with the leadership team at PAA.
"S&L" = Storage & Logistics

Tom's notes:

Came away incrementally positive following meeting. We met with management
in NYC today including CFO Al Swanson and VP of US Pipelines Sam Brown. We
came away incrementally positive on the setup for 2019. Management appears
comfortable around the S&L guidance for 2019 despite the recent move in
Permian differentials. Investor slides reiterated the EBITDA and growth outlook.
Looking ahead, we continue to think the company should focus on improving
credit metrics and retaining cash over a meaningful distribution increase. That
said, what the company should do with incremental cash seems like a good
problem to have. The story remains attractive with double digit fee-based
EBITDA growth in 2019 and attractive valuation vs. large-cap peers. Continued
discipline around cash allocation should support a rerate. Reiterate Overweight.

Well positioned for longer-term growth. Management highlighted that even
without dock space, the company is well-positioned to benefit from the longer term
growth in exports via aggregation and pipelines. Existing assets are well positioned
to take Permian barrels right up to the docks. The company has
optionality to reverse segments of Sunrise / Basin if Cushing becomes full or
connect Red River & Wichita Falls to bypass Cushing. Capline reversal also
appears to be getting more attention, although not likely in-service until 2021-22.
MY TAKE: Any comments you hear about a "glut" of oil at Cushing are total HOGWASH. PAA is one of the largest companies with storage at Cushing and they will resolve any problems.

Incremental color around Permian projects. Management clarified that Sunrise is
not expected to reach 500 mbpd any time in 2019 and utilization should decline
once the EPIC NGL-to-crude pipe and Cactus II are in-service 2H19. The company
further highlighted Cactus II should be nearly fully in-service in late 2019 at
around 500-600 mbpd. The 1 mmbpd JV with Exxon continues to move ahead
but no additional color was offered.

Strategic decision coming up - we expect company will maintain discipline.
Investors (and we) continue to debate the right strategic decision for PAA once
its balance sheet leverage is again comfortable. While a distribution increase is
likely in the cards as early as 1Q19 and important for Plains to remain competitive
with peers on a yield basis, we expect it will be balanced by continuing
improvement on credit metrics and retaining cash to fund capital projects. We
expect PAA will focus on organic growth over M&A for now.
-------------------------
MY TAKE: PAA is already generating more DCF than their current distributions. I expect them to start increasing quarterly distributions in early 2019 (Q1 or Q2). Now is a good time to add this SUPERSTAR midstream company if you are investing for high yield dividends.