21 Oct

Will 3Q15 Results Change Plains All American’s Valuation?

WRITTEN BY Rekha Khandelwal, CFA

PAA’s yield is higher than selected peer group

Plains All American Pipeline’s (PAA) forward distribution yield of 8.7% is ~210 bps (basis points) higher than its selected peer average. Peers included in the average calculation are Sunoco Logistics Partners (SXL), Enbridge Energy Partners (EEP), and Magellan Midstream Partners (MMP). Forward distribution yield is calculated as estimated one-year distribution per share divided by market price per share.

The Alerian MLP Index (AMZ) currently trades at a yield of 7.7%. The graph below compares the forward distribution yields of the four MLPs relative to their expected distribution growth.

Will 3Q15 Results Change Plains All American’s Valuation?

Lower expected distribution growth

For the next two years, Plains All American Pipeline is expected to have a compounded distribution growth of 3.2%. In comparison, SXL, EEP, and MMP are expected to have distribution growths of 17.7%, 4.5%, and 11.2%, respectively. So PAA’s higher yield seems to be justified by its lower-than-average forward distribution growth.

We looked at PAA’s expected distribution growth and coverage ratio in the previous part of this series. PAA forms 0.8% of the Guggenheim Multi-Asset Income ETF (CVY) and ~5.9% of the Global X MLP ETF (MLPA).

PAA’s EV-to-EBITDA multiple

Plains All American’s EV-to-EBITDA (enterprise value to earnings before interest, taxes, depreciation, and amortization) ratio using a trailing 12-month EBITDA is 11.9. In comparison, the ratio for SXL, EEP, and MMP is 12.6, 13.6, and 16.9, respectively.

Plains All American’s forward EV-EBITDA multiple is 9.5. The forward ratio is based on the current fiscal year EBITDA estimates. This indicates expectations of higher EBITDA growth for PAA in the third and fourth quarters of 2015. PAA expects an EBITDA growth of 10% in 2016 and 30% in 2017 over 2015.

Impact of IDRs

It should be noted that the EV-EBITDA ratio can be misleading when you’re trying to understand the unit valuation of limited partners. This is because the entire EBITDA in the EV-EBITDA ratio calculation may not be available to limited partners.

PAA has IDRs (incentive distribution rights) in its structure. It currently operates in the highest distribution tier with a 50% split. At the current annual distribution rate, this split means its GP (general partner) gets nearly 35% of the total distributions. The presence of IDRs is also reflected in PAA’s relatively higher yields.

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