Five Reasons To Pick Plains All American Pipeline Stock

PAA: Plains All American Pipeline logo
PAA
Plains All American Pipeline

Saudi-led production curtailments have provided a cushion to falling benchmark prices and supported the finances of upstream, midstream, and downstream operators. As a midstream company, Plains All American Pipeline provides fee-based transportation services including pipelines, gathering systems, and trucks between major producing regions and demand centers. Amid broader momentum in oil stocks, Trefis believes that Plains All American Pipeline stock (NASDAQ: PAA) has substantial room for growth due to 90% earnings contribution by fee-based Transportation & Facilities segments, negligible property impairments, stable EBITDA margins, flat long-term debt obligations, and a low single-digit decline in transportation and storage volumes.  The Transportation segment, which accounts for 50% of the total asset base and contributes a bulk of earnings, observed minor impairment charges last year. Also, higher U.S. crude oil production coupled with declining inventories are expected to assist the company’s revenues and earnings in 2021. Our interactive dashboard analysis highlights Plains All American Pipeline’s stock performance during the current crisis with that during the 2008 recession.

Timeline of 2020 Crisis So Far:

  • 12/12/2019: Coronavirus cases first reported in China
  • 1/31/2020: WHO declares a global health emergency.
  • 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
  • 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, as Covid-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
  • From 3/24/2020: S&P 500 recovers 78% from the lows seen on Mar 23, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.

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In contrast, here’s how PAA and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

  • 10/1/2007: Approximate pre-crisis peak in S&P 500 index
  • 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
  • 3/1/2009: Approximate bottoming out of S&P 500 index
  • 1/1/2010: Initial recovery to levels before accelerated decline (around 9/1/2008)

PAA Stock vs S&P 500 Performance Over 2007-08 Financial Crisis

PAA stock declined from levels of around $27 in September 2007 to levels of around $20 in March 2009 (as the markets bottomed out), implying PAA stock lost 28% from its pre-crisis level. It completely recovered post the 2008 crisis to levels of $26 in early 2010 – rising by 37% between March 2009 and January 2010. In comparison, the S&P 500 Index first fell 51% in the wake of the recession before recovering 48% by January 2010.

PAA’s Fundamentals To Improve With Rising Production Volumes and Stable Prices

PAA’s revenues grew by 66% from $20.2 billion in 2016 to $33.7 billion in 2019, supported by growth in crude oil gathering volumes. Also, improving net margins coupled with lower shares outstanding have resulted in a substantial jump in earnings per share. Recovery in benchmark prices and growing upstream production volumes have supported finances in recent quarters. With OPEC+ members extending production curtailments until there are clear signal of global macroeconomic rebound, midstream players in the U.S. are likely to benefit from sliding inventories and stable prices.

CONCLUSION

Phases of Covid-19 crisis:

  • Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
  • Late-March 2020 onward: Social distancing measures + lockdowns
  • April 2020: Fed stimulus suppresses near-term survival anxiety
  • May-June 2020: Recovery of demand, with gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
  • Since late 2020: Weak quarterly results, but continued improvement in demand and progress with vaccine development buoy market sentiment

Plains All American Pipeline stock has substantial room for growth due to 90% earnings contribution by fee-based Transportation & Facilities segments, negligible property impairments, stable EBITDA margins, flat long-term debt obligations, and a low single-digit decline in transportation and storage volumes.

With PAA stock gaining from the extension of OPEC curtailments, 2020 has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how the stock valuation for New Jersey Resources vs. World Wrestling Entertainment shows a disconnect with their relative operational growth. You can find many such discontinuous pairs here.

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