Plains Earnings: Permian Oil Volumes Continue To Drive Plains’ Recovery

Plains’ PAGP first-quarter earnings continue to show the benefits of higher Permian volumes, with adjusted EBITDA up 16% over last year to $715 million. The company reaffirmed adjusted 2023 EBITDA guidance attributable to Plains at a midpoint of $2.5 billion, which matches our forecast. We expect to maintain our $14 per share fair value estimate and no-moat rating.

Permian oil volume growth is beneficial for Plains, but it is still not in a great position. On the one hand, it is clear that Plains’ assets are still operating in a very oversupplied situation. On the other hand, this means that little capital is required to support growth, which means incremental volumes are largely earning very attractive returns.

Given the now ample cash flows, Plains’ management team has pivoted fairly successfully to returning much of its excess cash to shareholders. In the first quarter, asset sales and working capital inflows have combined to generate over $800 million in free cash flow available to pay distributions and reduce debt. Plains expects to have about $1.6 billion in available free cash flow in 2023. The company plans to use about $1 billion to pay distributions and the remainder for debt reduction. Given the stock is trading only at a very modest discount to our fair value, we think this is a realistic approach.

We think achieving its targeted $0.15 annual distribution increase after 2023 may prove a bit more difficult per our model, but we think the goal is probably the best use of capital for the time being. We wouldn’t hold it against management if it does not achieve this goal if the growth in the business cannot support it, as we think it is approaching the situation in a thoughtful way for investors.