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Quick Look: Plains All American Q4 Results and 2016 Guidance

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On 2/9/16, Plains All American announced Q4 results, which were slightly below their previous Guidance, primarily due to the timing of revenue recognition related to credit worthy shippers, not counter party defaults, as some may have interpreted.  Units dropped the morning after results were published, and management's comments did little to abate the selling throughout the day as crude continued to weaken.  The bridge between guidance and actual is below with our comments overlayed:

 


 

2016 Guidance

 

Management forecasts EBITDA is expected to increase 4.9% from $2,168MM to $2,275MM assuming the 2016 average crude price will be $47.50 (Q1 $35, Q2 $45, Q3 $55, Q4 $60) .  The company expects to have a DCF coverage ratio of .87x for 2016 at the midpoint.  However, since the guidance was provided in January, the rig count has continued to decline (25% lower) with further commodity price declines (20% lower), which questions whether the guidance is now realistic as producers further cut capex budgets..    The company sees the next 12 to 24 months as very challenging, and feels that the $1.6B preferred issuance was timed properly and will help address market uncertainties.    Below is the historical timeline of annual Adjusted EBITDA as projected by the company on the date of the last update:

 

 

 

 

Management Questions

 

The following are a few of the questions posed by MLP Analysts to Management during the call:

 

 

Question:  Any Changes to previously provided Distribution Guidance.  Answer:  No

 

 

Question:  Any thoughts about changing the company structure?  Answer:  Working on the analysis, which may be middle of the year, however, it is like trying to nail jello to a tree given the rapidly changing market valuations.

 

 

Question:  What % of MVC EBITDA is at risk in 2016?  Answer:  The MVC terms differ with makeup's occurring over monthly, quarterly and annual periods.  Worst case, 1  to 2% of the total could be at risk, which are non investment grade shippers.

 

 

Question:  Are you still one and done?  Answer:  Yes, we are.  We will not need capital for 2016 or 2017.  We do not have a gun to our head.

 

 

Question:  What is the downside if the market is strong or weaker than forecasted?  Answer:  3 to 4% on the downside to Guidance which may be offset by the benefits of contango.

 

 

 

Summary

 

PAA's distribution safety is a function of crude prices, which are well below ($33.72 current average)  the expected price of  $47.50.  Further, the company carries a hefty IDR payment from PAA to PAGP, which historically has been an incentive for LP growth.  However, with the prospects of declining capital expenditures, the idea of paying $400MM to the GP for no benefit, further adds risk to the units.  It is unclear how PAGP could reduce any Incentive Distribution Rights payments given the legal structure, so the burden of the IDR's should be assumed to be a head-wind along with the new preferred payments, to maintaining the distribution, let alone any future growth.   

 


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