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Crude Oil Prices Should Drive Plains All American’s Stock Price in 2016

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PAA’s correlation with crude oil prices

Plains All American Pipeline’s (PAA) stock price has no doubt been impacted by crude oil prices. The correlation between PAA’s stock price and the near-month WTI (West Texas Intermediate) crude oil futures price over the last 15 years was 0.67, which indicates a medium positive correlation between the two.

Notably, the correlation between WTI prices and PAA’s shares is even higher at 0.8 since the start of 2014. Crude oil prices have fallen sharply since mid-2014. PAA makes up ~2% of the Global X MLP & Energy Infrastructure ETF (MLPX), which invests in MLPs (master limited partnerships) and energy infrastructure companies.

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Gauging the outlook for Plains All American Pipeline

A recovery in oil prices could mean a higher stock price for Plains All American. But this also means that PAA shares could remain under pressure as long as crude oil prices remain weak.

During the company’s 3Q15 conference call, Greg Armstrong, Chairman and CEO of Plains All American, said, “While unutilized capacity within PAA’s transportation and facilities systems is a drag on near-term results, as we see a return to rising production levels it becomes a high impact benefit to Plains.” Armstrong also stated that we can expect to see the following:

  • Improved distribution coverage, with a minimum target distribution coverage of 105%–110%, which should fuel distribution growth
  • A return to a leverage metric more in line with the company’s target range of 3.5–4.0x
  • More favorable market conditions for Plains All American’s Supply and Logistics segment

Armstrong went on to say that “PAA is a very crude centric midstream entity and being long capacity in an extended down cycle for crude oil is challenging.”

Anticipation for Plains All American Pipeline?

Plains All American Pipeline is expected to provide detailed guidance for 2016 in its conference call in February. But we should bear in mind that low commodity prices have impacted most infrastructure MLPs, including Enterprise Products Partners (EPD), Enbridge Energy Partners (EEP), and Magellan Midstream Partners (MMP).

For more analysis, check out Market Realist’s Master Limited Partnerships page.

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