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Outlook for Plains All American Pipeline: 4Q15 and Beyond

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Consensus ratings for PAA

Of the analysts surveyed by Bloomberg, 65% rate Plains All American Pipeline (PAA) a “buy,” and 31% rate it a “hold.” Only 4% rate it a “sell.” The consensus target price for PAA is $41.35. Its units currently trade near $32.97. If the stock does attain this target price within a year, it would mean a 25% price return for investors.

As for PAA’s peers, 71% of analysts rate Sunoco Logistics Partners (SXL) a “buy,” 50% rate Enbridge Energy Partners (EEP) a “buy,” and 79% rate Magellan Midstream Partners (MMP) a “buy.”

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PAA’s low distribution coverage ratio, low distribution growth expectations over at least the next one year, and high leverage levels likely contribute to the relatively low “buy” recommendations.  PAA’s 3Q15 long-term debt-to-EBITDA (earnings before interest, tax, depreciation, and amortization) ratio was 4.5x. It targets a ratio between 3.5x and 4x.

The above table shows recommendations and target prices for Plains All American from some of the brokers surveyed. PAA forms ~0.6% of the Multi-Asset Diversified Income ETF (MDIV) and ~6.6% of the Alerian MLP ETF (AMLP).

Outlook for Plains All American Pipeline

PAA has revised its mid-point EBITDA guidance for full year 2015 to $2.2 billion, 3% below the $2.3 billion guidance it had previously provided.

It also plans to reduce the size of its 2016 capital program by deferring certain projects and modifying existing projects. It currently expects its 2016 capital program to be 25% to 30% lower than its $2.2 billion 2015 capital program.

Greg Armstrong, chairman and CEO (chief executive officer) of Plains All American, said in the 3Q15 earnings release, “We remain constructive on the intermediate to long-term outlook for crude oil prices, activity levels, and PAA’s growth prospects. In the near term we remain cautious due to the impacts of excess capacity and related competitive pressures, and our fourth quarter guidance reflects our most current view of the near term environment.”

PAA suggested that it is open to alternatives to manage the GP (general partner) burden on its cost of capital. In response to a question, Armstrong said, “Clearly, in the current cost of capital environment, the GP burden is incrementally more negative on our cost of capital at the margin than it would have been a couple years ago.”

He noted that currently the “weighted average cost of capital is probably closer to 10.5% and the General Partners about 350 basis points in that.”

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