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Plains All American Pipeline (PAA) Continues to Struggle

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On Feb 11, 2016, we issued an updated research report on Plains All American Pipeline, L.P. (PAA - Free Report) . The company faces substantial challenges from volatility in commodity prices, stringent government regulations, delay in completion of ongoing growth projects and increasing competition in the midstream business. Systematic divestment strategy and favorable liquidity position are expected to ease some of the pressures.

Plains All American Pipeline recently reported fourth-quarter 2015 adjusted earnings of 24 cents per unit, lagging the Zacks Consensus Estimate of 46 cents by 47.8%. The partnership reported fourth-quarter revenues of $4,996 million, short of the Zacks Consensus Estimate of $6,181 million by 19.2% and down nearly 47.2% from year-ago revenues.

Plains All American Pipeline’s operations are subject to extensive federal, state and local regulations on transportation and processing of materials and protecting the environment, the compliance with which increases the partnership’s operating costs and thereby affects margins.

Total long-term debt of the partnership at the end of fourth-quarter 2015 was $10.4 billion, up from the 2014-end level of $8.7 billion. The partnership is exposed to market risk due to the short-term nature of its commercial paper borrowings and the floating interest rates on its credit facilities. In December, the Federal Reserve increased the short-term interest rate by 0.25%. This will raise borrowing costs and adversely impact Plains All American’s cash flow.

However, on the bright side, Plains All American Pipeline has been pursuing a divestment strategy to utilize the proceeds to focus more on core areas. In 2015, the company divested non-core assets worth nearly $325 million, expected to be close by the first quarter of 2016. The company anticipates divestment proceeds in the range of $400–$500 million in 2016.

The partnership exited fourth-quarter 2015 with committed liquidity of $3.9 billion, higher than the 2014-end level of around $2.6 billion. The company projects fee-based contribution to increase to 78% in 2016 from 74% in 2015. Apart from utilizing funds in growth projects, a stable financial position allows Plains All American Pipeline to offer distributions at regular intervals. 

Zacks Rank

Plains All American carries a Zacks Rank #4 (Sell). Some favorably ranked stocks in the midstream space include Boardwalk Pipeline Partners, LP , Spectra Energy Partners, LP and Shell Midstream Partners, L.P. (SHLX - Free Report) , all carrying a Zacks Rank #2 (Buy).

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