PAA’s crude oil boom
In order to serve the needs of the “Big 6” supply areas—including the Permian, Mid-continent, Williston, Gulf Coast, Eagle Ford, and Rocky Mountains, along with Canada—Plains All American Pipeline offers multiple pipeline connections, storage, rail and truck facilities, and marine access facilities. The company also has natural gas and natural gas liquids (or NGLs) storage, supply, and fractionation facilities in many of these areas.
PAA plans a significant rise in investment to benefit from higher oil production
In order to capture the benefit of a huge crude oil production increase, PAA has started investing in a major way in the most prominent resource basins. Organic growth capital has increased manifold over the past decade, from an average of ~$400 million from 2006 to 2010 to $1.6 billion in 2013. Apart from $3.1 billion in already approved projects, PAA plans to invest another $4.4 billion in potential investments that are at various stages of approval. This has resulted from capacity enhancement through the value chain of midstream energy infrastructure projects.
PAA anticipates the increased crude oil production to weigh towards light crudes, which are abundantly available in the new resource basins. This is a shift from the traditional heavy crudes imported mostly from the Arabian Peninsula. Refineries are expected to increase light crude oil runs by 1.4 million barrels per day, or 8.5% by 2018 if domestic light crude oil continues to show a price advantage over the international price.
Crude price differentials may present opportunities
The imbalance in higher domestic supply and flat demand would narrow the price differential between WTI and the U.S. Gulf Coast. If the domestic crude oil price starts falling as a result of domestic over-production, it would also lead to condensate and crude oil exports, if the ban on exporting crude oil changes in the U.S. However, PAA anticipates that the forecasted level of import displacement and increased processing of light crudes aren’t sufficient to offset increased production resulting in a material amount of light crude without a readily available market, as the graph above shows.
Fee-based EBITDA will increase for PAA
PAA has an extensive presence in the major supply and demand market hubs in the U.S. This diverse asset base reduces any significant revenue concentration from any particular geographic region. The largest single project for 2014 assumes only 18% of 2014 capital expenditure. The majority of PAA’s assets are fee-based, lending stability to its revenues. Over time, PAA expects to cover 80% of its EBITDA as fee-based, driven by continued organic capital investments and higher returns on supply and logistics operations in the midstream business. PAA’s interstate common carrier liquids pipeline operations are subject to Federal Energy Regulatory Commission (or FERC) rate regulations.
Plains All American Pipeline, L.P. (PAA) is a master limited partnership that operates in the midstream energy business. Plains GP Holdings LP (PAGP) owns PAA’s general partner. PAA is a component of the Alerian MLP ETF (AMLP), Global X MLP ETF (MLPA), and Global X MLP & Energy Infrastructure ETF (MLPX).