When it comes to oil production, some investors still believe Saudi Arabia is the king of crude. However, it’s the United States that now leads the world in both natural gas liquids (NGL) and oil production. Consequently, midstream oil and gas companies are seeing heightened demand for their transport services, which is why I’m bullish on Plains All American Pipeline (NASDAQ:PAA).
The U.S. now accounts for 967.144 billion cubic meters of NGL production per year, equivalent to 42.7% of the global supply. Further, in August 2023, U.S. oil production reached a record high of 18 million barrels yearly, representing 36.2% of global output. And while the supposition is that OPEC+ is the deciding factor in the global oil market, non-OPEC+ countries like the U.S., Canada, and Brazil are expected to significantly contribute to oil market growth in 2024, potentially increasing production by 1.2 million barrels per day (bpd).
High Demand for Midstream Operations
The oil and gas lifecycle involves three components:
- Upstream: The exploration and production of crude oil and natural gas
- Midstream: The transportation and storage of crude oil and natural gas
- Downstream: The refinement of crude oil and natural gas into finished products
According to market research and advisory group Mordor Intelligence, the domestic midstream market “is expected to register a CAGR of more than 4.15% during the forecast period of 2022–2027,” with the transportation segment “expected to dominate the United States oil and gas midstream market.”
Fitch Ratings echoes this sentiment, stating, “Global demand for crude oil and natural gas from the U.S. and Canada increased in 2023, and Fitch expects this trend to continue through 2024, supported by growing global energy needs and heightened considerations for energy security.”
An Under-the-Radar Large Cap Midstream
With a market capitalization of $11.08 billion, Plains All American Pipeline is comparable in size to more popular large-cap names like Dropbox (NASDAQ:DBX), CarMax (NYSE:KMX) and Ally Financial (NYSE:ALLY). But just because PAA doesn’t have an ongoing schedule of prime time cable network commercials doesn’t mean it should be overlooked by investors.
Bolstered by record U.S. output, midstream infrastructure is a growing demand that Plains All American Pipeline can help satisfy. The company handles more than seven million bpd of crude oil and NGL, transporting raw materials from production basins to major market hubs and transportation gateways, and is considered a major player in the movement of U.S. and Canadian energy supplies.
Since its IPO in 1998, the master limited partnership has amassed NGL storage facilities from Fort Saskatchewan to Florida, bicoastal operations, and a pipeline network that stretches from Alberta, Canada, to the Gulf of Mexico.
In total, according to Plains All American Pipeline’s webiste, the company’s assets include the following:
- 18,300 miles of active crude oil and NGL pipelines
- 140 million barrels of storage capacity
- Approximately 2,100 trucks and trailers
- 6,000 crude oil and NGL railcars
Sound Earnings, Fundamentals & Technicals
PAA’s Q3 earnings resulted in the company raising its full-year 2023 guidance for adjusted EBITDA to $2.6–$2.65 billion from $2.45–$2.55 billion. The company’s Q4 earnings date is February 9, 2024, and analysts forecast EPS of 36 cents. In Q3, EPS rose year-over-year to 35 cents from 33 cents during the same period a year prior.
After posting two years of sales contraction in 2019 and 2020, Plains All American Pipeline saw sales growth of 80.7% in 2021 and 36.3% in 2022. In the same years, pre-tax income growth came in at 127.74% and 96.53%, net income growth was 122.8% and 74.62%, and EPS growth was 114.32% and 115.96%, respectively.
As of January 2024 (TTM), the company boasts an undervalued P/E ratio of 9.7. For context, the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) — which tracks the 500 largest companies in the S&P 500 index — has a P/E ratio of 21.72.
Technical sentiment is also favorable. PAA is currently trading above its 50-day and 200-day moving averages and the overall and moving average consensus readings on a one-month timeframe are bullish, as you can see below.
An MLP with a Healthy Yield
Plains All American Pipeline is organized as a master limited partnership (MLP). Because of its pass-through tax structure — like real estate investment trusts and business development companies — PAA pays a noteworthy distribution (MLP-speak for dividend) to its unitholders (MLP-speak for shareholders).
PAA has a distribution with an annualized forward yield of 8.09%. Q4 2023 will mark the 16th consecutive quarter in which the company has maintained or increased its payout. After its Q3 earnings were reported, PAA’s board approved a 19% increase to its annualized distribution from $1.07 to $1.27 per unit of Class A and common shares, or 31 cents for Q4. This comes after a 23% year-over-year increase to its distribution from September 2022 to September 2023.
That Q4-2023 distribution is payable on February 14, 2024, to unitholders of record by close of business on January 31, 2024, meaning that investors who get on board before the end of the month will qualify for the next payment.
Is PAA Stock a Buy, According to Analysts?
PAA stock earns a Hold consensus based on two Buys, two Holds, and one Sell assigned by analysts in the past three months. The average PAA stock price target is $18, implying 12.5% upside potential. Even the stock’s low price target demonstrates no downside potential, as the stock is currently trading at around $16.
The Takeaway
The U.S. is now the number one producer of oil and NGL in the world, requiring bolstered efforts from midstream companies to transport and store those fossil fuels from their basins to refineries. With 18,300 miles of pipeline and 140 million barrels of storage capacity, PAA is worth consideration for both its growth potential and distribution yield.
