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Plains All American Pipeline, L.P. (PAA - Analyst Report) reported third-quarter 2012 pro forma earnings per unit of 73 cents, surpassing the Zacks Consensus Estimate of 47 cents as well as the prior-year quarter figure of 71 cents.  

On a GAAP basis, the partnership’s quarterly earnings per unit were 27 cents compared with 74 cents in the year-ago quarter. The difference between pro forma and GAAP earnings was due to a cost of $31.0 million related to derivative activities, a charge of $125.0 million associated with asset impairments, equity compensation costs of $12.0 million and a gain of $11.0 million on foreign currency revaluation.

Total Revenue

Overall revenue of Plains All American Pipeline in third-quarter 2012 was $9.4 billion, beating the Zacks Consensus Estimate of $9.1 billion and year-ago figure of $8.8 billion. The year-over-year growth was driven by strong performance across the segments.

Segment Update

Transportation: In third-quarter 2012, volumes from transportation activities posted an upsurge of 16.7% to 3,530 thousand barrels per day with operation in Basin being the major contributor. Adjusted profit during the quarter rose sharply by 23.0% year over year. The profit was driven by several acquisitions in late 2011 and early 2012 and higher pipeline tariffs and volumes; partially offset by an increase in operating, and general and administrative expenses.

Facilities: In the reported quarter, this segment’s adjusted profit climbed 48.0% year over year. The growth was due to capacity expansion from the acquisition of BP NGL and completion of several organic growth projects.

Supply and Logistics: Segment profit increased 5.0% year over year in the reported quarter. The growth resulted from encouraging crude oil market conditions, and increased crude oil lease gathering and natural gas liquids sales volumes.  

Operational Update

In third-quarter 2012, Plains All American Pipeline’s total cost and expenses increased to $9.1 billion compared with $8.5 billion. The combined effect of a rise in purchases and allied costs, field operating expenses, general and administrative expenses, and depreciation and amortization charges were responsible for this hike in expenses.

In the quarter under review, the partnership’s adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”) rose to $522.0 million from $366.0 million in the prior year. This was primarily driven by higher-than-estimated average pipeline volumes and tariffs.

In the third quarter of 2012, positive effect from the revenue surge could not mitigate the rise in total costs. Therefore, operating margin decreased to $247.0 million from $357.0 million in the year-ago quarter.

Financial Screening

Cash from operating activities during the quarter was $533.0 million versus $780.0 million in the prior-year quarter.

Long-term debt of the partnership as of September 30, 2012 was $5.8 billion compared with $4.5 billion as of December 31, 2011.

Cash Distribution

The new quarterly distribution rate of the partnership is approximately 54 cents per unit or $2.17 per unit on an annualized basis, payable on November 14, 2012. The new distribution rate reflects quarterly growth of 1.9% and rise of 9.0% year over year.

Full-year 2012 Guidance

Plains All American Pipeline increased the mid-point of its full-year 2012 adjusted EBITDA guidance from the previous projection by 7.0% to $2.0 billion. This revision reflects the partnership’s expectation of favorable crude oil production growth in North America along with high demand of its products and services.

Peer Comparison

Enterprise Products Partners L.P. (EPD - Analyst Report), which competes with Plains All American Pipeline, L.P., reported third-quarter 2012 adjusted earnings per limited partner unit of 68 cents, surpassing the Zacks Consensus Estimate of 60 cents and 23.6% higher than 55 cents in the year-ago quarter.

Revenues in the quarter under review declined nearly 8% year over year to $10,468.7 million. The underperformance was mainly due to lower commodity prices; partially offset by higher overall volumes. Quarterly revenue failed to meet the Zacks Consensus Estimate of $11,409.0 million.

Our View

Plains All American Pipeline has crude oil pipelines and storage assets portfolio in prospective oil producing regions. Moreover, the partnership intends to invest over $1.0 billion under its several organic growth projects through 2013. These initiatives will further enable the partnership to expand its existing operations to serve major U.S. refinery and distribution markets. We believe that Plains All American Pipeline’s positional advantage will fuel its future performance. These positives seamlessly blend with our short-term Zacks #2 Rank (Buy rating).

However, the positives could be marginally offset by stringent regulations and higher costs associated with offshore drilling, and commodity price fluctuations.

Houston, Texas-based Plains All American Pipeline, L.P. owns assets strategically located in well-established oil producing regions, catering to major U.S. refinery and distribution markets. With a market capitalization of $14.90 billion, the partnership has 3,800 full time employees.

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