On May 6th after market close, Plains All American Pipeline (PAA) announced that it had generated adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) of $739 million for 1Q13, as compared to $472 million in 1Q12. Previously, PAA had stated that it expected the midpoint of its EBITDA in 1Q13 to be $615 million, resulting in a 20% beat for the quarter. Also, research analysts had estimated EBITDA of $610 million for the quarter (the average of the analysts’ estimates). Lastly, PAA adjusted its 2013 EBITDA guidance by $135 million, changing it from $2.03 billion to $2.16 billion. These were all strongly positive signals for the name. PAA stock increased from $57.26/share on May 6th to close at $58.37/share on May 7th, or a 2% increase. During the same day, the Alerian MLP Index was relatively unchanged and the S&P500 increased by 1%.
Plains stated that the reason for the out-performance during the quarter was mainly due to its supply and logistics segment, where adjusted segment profit of $3.95 per barrel was significantly above guidance. Management noted that the out-performance was driven by “crude oil basis differentials that were wider than forecasted, particularly the differential between WTI at Midland and Cushing. The quarter also benefited from a wider-than-forecasted LLS (Louisiana Light Sweet) to WTI differential and wider differentials between WTI and several of the Canadian grades.”
Plains’ reported results are a positive signal for other MLPs with significant crude logistics and transportation assets, such as Genesis Energy (GEL) and Sunoco Logistics Partners (SXL). Additionally, PAA makes up a significant portion of the Alerian MLP ETF (7.2%), and positive performance for the name boosts performance for the entire ETF.
However, it should be noted that on a forward looking basis, the company and market participants expect that the supply and logistics segment will not perform as it did during 1Q13, as differentials have compressed which has reduced some of PAA’s profit opportunity. For example, the spread for WTI at Midland (in West Texas) versus WTI at Cushing (in Oklahoma, and the main trading hub where WTI oil is priced) averaged $3.35/barrel in 1Q13; at points it was as wide as $14/barrel. For 2Q13, through the close on May 8th, the spread averaged $0.04/barrel. PAA’s assumptions for the company’s 2013 guidance takes such spread compression into consideration.
In summary, PAA had a strong 1Q13, which bodes well for names such as GEL and SXL in addition to the Alerian MLP ETF (AMLP). However, the conditions leading to PAA’s out-performance have since changed and earnings are likely to be more muted in the near future given current market conditions. Investors should note that significant spread widening could positively affect the aforementioned names.
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