Plains Earnings: More Distribution Increases and Bolt-On Deals Sounds Good To Us

Plains’ PAGP third-quarter results were very good, as it boosted its 2023 guidance to just over $2.6 billion compared with earlier expectations of about $2.5 billion. The main drivers of the increases were not the two recent bolt-on deals, as they are contributing about $10 million to $15 million or so to the improved outlook, but higher levels of tariffs. Permian volume guidance actually declined a bit for 2023, as it was impacted by the very hot weather in August that impacted gas processing and field compression in the Permian basin. After updating our model, our fair value estimate increases to $16 from $14 per share for both Plains entities, reflecting its improved cost structure. Our nomoat rating is unchanged.

Plains also added Rattler’s Southern Delaware and LM Energy’s Northern Delaware assets for $135 million net to Plains. We consider this a repeat of its playbook from last quarter where it acquired Diamondback’s interest in the Northern Midland Basin gathering system for $145 million net to Plains. These assets all seem close to existing Plains assets and easily leveraged for capital and cost efficiencies.

Plains also continues to refine its capital allocation plan. With leverage at 3.4 times for the quarter, Plains has now lowered the midpoint of its targeted leverage range to 3.5 times from 4 times, better aligning it with midstream peers. Consistent with its improved leverage and higher cash flows, it boosted its distribution $0.20 per unit to $1.27 for 2024 from $1.07 in 2023, a bit better than its targeted $0.15 per unit annual increase. We think ongoing 10% increases beyond 2024 are supportable for the medium term.