Bullish, 8%-Yielding Plains All American Pipeline Stock’s Payout Hiked 23%

By John Whitefoot, BA | July 3, 2023

Why PAA Stock Has Big Potential

Energy stocks were the biggest winners in 2021 and 2022, and while the sector has done well over the last year, it can’t compete with the red-hot technology sector. What energy stocks will always have over tech stocks, though, are dividends.

One energy stock that has been outpacing the broader market in terms of share price—and that pays reliable, high-yield dividends —is Plains All American Pipeline, L.P. (NYSE:PAA).

The master limited partnership’s Google-friendly name tells you pretty much everything you need to know about its operations. Plains All American Pipeline is one of the largest independent midstream energy companies in North America, providing logistics services for crude oil, natural gas liquids (NGL), and natural gas in the U.S. and Canada.

On average, Plains All American handles more than seven million barrels per day of crude oil and NGL through its extensive North American network, which is located in key producing basins, major market hubs, and transportation gateways. (Source: “Investor Presentation: Second-Quarter 2023,” Plains All American Pipeline, L.P., last accessed June 26, 2023.)

The company’s crude oil segment, which accounts for roughly 80% of its revenue, includes pipelines, storage, terminaling, and trucks. The company has the following:

More than seven million barrels per day of pipeline tariff volume
More than five million barrels per day of Permian pipeline tariff volume
About 135 million barrels per month of liquid (crude oil and NGL) storage capacity
About 185,000 barrels per day of NGL fractionation capacity

(Source: Ibid.)

As of December 31, 2021, Plains All American Pipeline, L.P.’s infrastructure also included:

18,300 miles of active crude oil pipelines and gathering systems
74 million barrels of commercial crude oil storage capacity
38 million barrels of active, above-ground tank capacity
Four marine facilities
One condensate processing facility
Seven crude oil rail terminals
2,100 crude oil railcars
640 trucks
1,275 trailers

(Source: “Assets,” Plains All American Pipeline, L.P., last accessed June 26, 2023.)

The partnership’s infrastructure is definitely not static. For example, in February, the company announced that it had closed on the previously announced sale of its non-operated ownership interest in the Keyera Fort Saskatchewan facility to Keyera Corp (TSE:KEY, OTCMKTS:KEYUF) for about CA$367.0 million (about US$271.0 million). (Source: “Plains All American Completes Divestiture of Interest in Keyera Fort Saskatchewan Facility,” Plains All American Pipeline, L.P., February 13, 2023.)

Q1 Net Income Up 126% Year-Over-Year; Net Cash Up 119%

For the first quarter ended March 31, Plains All American Pipeline announced that its net income rallied by 126% year-over-year to $422.0 million, or $0.2675 per unit. Its net cash provided by operating activities was up by 119% year-over-year, at $743.0 million. (Source: “Plains All American Reports First-Quarter 2023 Results; Reaffirms 2023 Guidance,” Plains All American Pipeline, L.P., May 5, 2023.)

The company generated first-quarter free cash flow (FCF) of $823.0 million, up significantly from its 2022 first-quarter FCF of $200.0 million. Its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) went up by 16% year-over-year to $715.0 million. Its distributable cash flow was up by 11% year-over year, at $0.62.

During the quarter, Plains All American Pipeline, L.P. paid off about $450.0 million of its debt, which currently stands at $8.3 billion.

Commenting on the first-quarter results, Willie Chiang, the partnership’s chairman and CEO, said, “Plains remains focused on execution, and our company is off to a strong start to the year despite macro uncertainty.” (Source Ibid.)

Outlook for Full-Year 2023

Thanks to the solid financial results, the company reaffirmed its 2023 guidance. “We remain confident in our ability to deliver on our 2023 plan with our contracting profile and significant hedging within our Crude Oil and NGL segments serving to mitigate risk,” said Chiang.

For full-year 2023, Plains All American Pipeline expects to report:

Adjusted EBITDA in the range of $2.45 to $2.55 billion
About $1.6 billion of FCF, allowing it to “meaningfully” increase returns of capital to unitholders and further reduce debt
Investment capital of $325.0 million
Maintenance capital of $195.0 million

Plains All American Pipeline, L.P. Hiked Distribution by 23%

Plains All American Pipeline’s strong, reliable FCF generation allows it to execute its previously announced capital allocation framework, which is focused on increasing returns to its unitholders and enhancing its financial flexibility.

In February, the company increased its quarterly cash dividend to $0.2675 per unit, for a current yield of about eight percent. This represents a 23% increase from Plains All American Pipeline stock’s previous quarterly distribution of $0.2175. (Source: “Plains All American Pipeline and Plains GP Holdings Announce Distributions,” Plains All American Pipeline, L.P., January 9, 2023.)

In May, management held PAA stock’s distribution at $0.2675 per unit.

Investors might think that the partnership raising its dividend by 23% and paying down $450.0 million of its debt in the first quarter might be stretching its bank account thin. It’s not.

Plains All American Pipeline, L.P.’s FCF after distributions in the first quarter was $581.0 million. Moreover, the company’s payout ratio is low for an energy limited partnership, at just 60.5%. This provides protection in case something drastic happens. It also gives management the financial flexibility to raise Plains All American Pipeline stock’s payout if it wants to.

Plains All American Pipeline, L.P. has one of the most reliable high-yield dividends in the energy sector, and it targets multiyear sustainable growth. Its 8.5% dividend yield seriously outperforms the yield of every other sector in the S&P 500, which itself only has an average dividend yield of 1.6%.

PAA stock’s dividend growth is expected to continue, with an expected three-year forward compound annual growth rate (CAGR) of 12.4%, compared to 3.5% for other master limited partnerships.

Plains All American Pipeline Stock Up 49% Over Last 12 Months & Has 57% Upside

Strong industry dynamics have helped Plains All American Pipeline, L.P.’s unit price trend steadily higher, easily outperforming the broader market. As of this writing, PAA stock is up by:

5.0% over the last three months
5.0% over the last six months
49.0% over the last 12 months

Those are big gains, and more gains are expected from Plains All American Pipeline, L.P.’s units.

Chart courtesy of StockCharts.com

Wall Street analysts have provided a median 12-month unit-price estimate of $15.00 and a high estimate of $21.00. This points to potential gains in the range of 12% to 57%.

Even the analysts’ low estimate of $14.00 points to potential gains of five percent. The high estimate of $21.00 would put it almost 30% above its pre-pandemic level of around $16.00 per unit.

The Lowdown on Plains All American Pipeline, L.P.

Plains All American Pipeline, L.P. is firing on all cylinders. The company has reported superb financial results, provided robust guidance, and recently raised its dividend by 23%. Furthermore, Plains All American Pipeline stock’s unit price has been crushing the broader market,

Permian Basin growth and high global demand for North American energy both bode well for PAA stock’s price and its reliable, high-yield dividends.