Takeaways From PAA’s Analyst Day

Last week, I attended the Plains All American Pipeline (PAA) analyst day. It was held at Minute Maid Park, home of the Houston Astros. The meeting was in the Union Station Lobby, a renovated train station that is over 100 years old. Upon entering, there was county music blasting and plates of barbecue being filled from a buffet. Totally Texas.

Transitional Year
The last time I went to the PAA analyst day was in 2014. That year, it was all flowers and sunshine. Everyone loved each other and we ended the meeting by holding hands and singing Kumbaya. This year, although the meeting had a positive tone and was generally upbeat, it was clear management was still reeling from a rocky 2016 which included a distribution cut and simplification transaction. PAA Chairman and CEO Greg Armstrong described the recent energy cycle as “painful and extended.”

One of the key takeaways from the meeting was that we can expect 2017 to be a transitional year backed with a conservative mindset. By taking steps like eliminating IDRs, resetting the distribution, establishing a 115% distribution coverage ratio, and selling non-core assets, PAA believes it is in a position to move forward as the industry continues its recovery.

The Permian is So Hot Right Now
As I mentioned a few weeks ago the Permian is “Where the Party At.” A large part of the company’s recovery strategy is focused on taking advantage of the boom in the Permian. According to company executives, PAA is the largest provider of midstream crude oil services in the basin. A quick glance at the upcoming project list makes it clear that management plans on the boom in the basin being a cornerstone of future operations.

Source: Plains All American Pipeline

You’ll notice from looking at the above slide that PAA is building Permian takeaway capacity both to the Gulf Coast and to Cushing, Oklahoma. Almost all the increased production flowing out of the Permian is expected to go to the Gulf (as evidenced by existing infrastructure and project announcements for new pipeline or expansion projects), but Plains believes there will be Mid-Continent refiners that will drive demand for Permian light crude to Cushing.

Efficiency More Important Than Oil Prices
While most of us in the energy industry wouldn’t mind seeing $100/bbl oil again, PAA executives explained that reaching this price point isn’t really needed for growth. Thanks to new technologies, wells are being drilled two times faster and seeing three times as much production. Because of this, even with oil prices hovering around $50/bbl there is still incentive for producers to drill and therefore a need for midstream services.

Source: Plains All American Pipeline

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