Plains All American Pipeline (PAA) is a publicly-traded master limited partnership, headquartered in Houston, Texas. A member of the Fortune 500, it is in the oil pipeline business throughout the United States, and has subsidiary businesses in natural gas storage in Louisiana and Michigan and in liquefied petroleum gas in Canada. Throughout nearly 20 years on the New York Stock Exchange, it has grown aggressively through asset acquisitions, primarily pipeline but additionally some gas storage assets.
PAA announced last month that it had entered into an agreement to acquire the substantial Canadian natural gas liquids and liquified petroleum gas companies held by British Petroleum (BP). PAA CEO Greg Armstrong stated that the $1.67 billion resource purchase – made through their Plains Midstream Canada wholly-owned subsidiary – would complement PAA’s heavy demand-focused holdings by increasing their investment in the supply-side of the petroleum, crude, and natural gas business. The purchase is subject to regulatory considerations but is expected to through by the beginning of 2012’s second quarter, if not earlier.
In PAA’s most recent conference call, of December 1, 2011, Greg Armstrong discussed both the aforementioned BP purchase, along with four smaller purchases with an additional aggregate value of $620 million, totaling approximately $2.3 billion for all five acquisitions. Each of these acquisitions is part of a strategy to grow the asset side of the business, to complement the infrastructure already in place for transport and distribution. As part of this strategy, PAA will invest an addition $200 million over the next two years in order to integrate the new companies as quickly as possible.
As a result of the success in making these acquisitions, Armstrong stated that the target for growth in distribution in 2012 has been raised from 8 to 9%. Armstrong also noted that solvency is not an issue, with the majority of these new acquisitions being essentially pre-financed by current liquidity and already-secured bank funding commitments.
The majority of the new assets are Canada-based, and therefore financials can vary a little from year to year based on annual income tax. But according to Armstrong, PAA is still able to estimate the multiple of invested capital to unlevered distributed cash flow to be around eight to nine times. Although of course these acquisitions should have no significant effect on the 2011 fiscal year, they are likely to be very significant in 2012 and beyond.
PAA’s stock performance over the past five years is worth a look. It’s weathered national and world economic events far better than the stock index on average. From its high of around $47 per share in later 2007, PAA’s stock dropped by not quite 50 percent after the financial crisis of 2008. Since then it has only gone up, surpassing its previous high only a year later, hovering around the low- to mid-70s through January, 2012.
With PAA’s recent acquisitions, the stock price is liable to stay steady or rise by the second or third quarter of 2012. However, any incidental capital gain is only icing on the cake. As a master limited partnership with a long history of strong earnings growth, the QRDs are the main focus. It’s current ratio and quick ratio are both low at the moment, at 1.04 and 0.69, respectively (as of this writing). However, taking into account its recent acquisitions, the low liquidity is not surprising.
The PE ratio has been steadily trending upward for months now, and may come to a head in the quarter or two as these acquisitions are finalized. Thus, investors thinking of taking a stake might be advised to do so sooner than later. I would call the investment risk only mild to slightly moderate, with a comparatively high return over the medium- or long-term.
Disclosure: I do not currently hold any position in the stocks mentioned, nor do I intend to initiate any such position within 72 hours of publication.