Plains All American Pipeline, L.P. (PAA - Free Report) and Plains Group Holdings, L.P. (PAGP - Free Report) have jointly announced their plans to reduce debt by approximately $1.4 billion. The partnership stated that it has chalked several measures to meet its debt-reduction plan.
Steps to be Taken
The partnership plans to reduce its annualized distribution to $1.20 per unit from the previously set $2.20 per unit from the Q3 distribution that is payable in November 2017. The reduction in distribution is expected to bring down annual distribution outflow by approximately $725 million per year or about $1.1 billion over the last 6 quarters.
Plains All American is also looking forward to the completion of the pending $700 million non-core/strategic asset sales. It has decided to decrease the hedged crude oil and NGL inventory volumes and related debt by approximately $300 million.
Additionally, the partnership has also decided to fund its second-half 2017 and full-year 2018 expansion capital program of approximately $1.15 billion by combining non-convertible, perpetual preferred equity of approximately $600 million along with a portion of the asset sale proceeds.
The partnership will utilize its retained cash flow and remainder proceeds from the asset sale proceed is expected to slash the debt from the level of $11.15 billion at Jun 30, 2017 to $9.7 billion by Mar 31, 2019.
Drop in Interest Burden
For the second-quarter 2017, the partnership’s interest expense was $127 million compared with $114 million in the year-ago period. With reduced debt, this interest expense is expected to decline as well. This will in turn strengthen Plains All American’s balance sheet.
What is working in Favour of Plains All American?
Plains All American maintains a systematic capital investment strategy to expand its operations through organic growth initiatives. The partnership currently has a deep pipeline of new projects in the resource-rich regions. The partnership is expected to gain substantially once these projects are completed.
Permian Basin continues to be a key oil producing region in the United States. The gradual recovery in commodity prices could further increase oil production from this region. Higher crude production will increase demand for pipeline services and ensure that higher volumes will benefit partnerships and companies like Plains All American, Archrock Partners, L.P. , Boardwalk Pipeline Partners L.P. (BWP - Free Report) and others engaged in interstate and intrastate marketing, transportation and terminalling of crude oil.
Units of Plains All American have lost 25.1% compared with the industry’s loss of 4.7% in one year.
Stringent government regulations, potential delays in the completion of projects and increasing competition might be potential growth deterrents for the partnership.
Plains All American carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.
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