Credit Suisse Downgrades Plains GP Holdings, Says It's Even More Conservative Than Guidance

Credit Suisse, coming across completely flabbergasted, commented on Plains All American Pipeline, L.P. PAA and Plains GP Holdings LP PAGP, "[We] never thought we would be more conservative than guidance. But we are."

In a research note out Wednesday, the research firm rated Plains All American at Neutral with a lowered price target from $33 to $19, and downgraded Plains GP from Outperform to Neutral, with a lowered price target of $8 from a previous $14.

Following the note, Plains All American was seen down 1.64 percent on the day at $15.62, while Plains GP was up 7.14 percent on the day at $5.70 (rebounding from a substantial drop Tuesday).

Justification For The Ratings And Price Targets

Citing "too high" 2016 guidance against management assumptions, Credit Suisse justified its downgrade of Plains GP. "The numbers were light for the quarter primarily on volume deficiencies under MVCs and lower than expected volumes," the analysts explained.

"We think 2016 guidance is too high as management indicated it assumes $47.50/bbl crude when it was put together and both the strip and the CS house forecast are significantly lower," the note continued.

Related Link: Plains All American Downgraded At JPMorgan, Few Levers Seen In Near-Term

Based upon those assumptions, Credit Suisse projected that the company guidance for 2016 is approximately 4 percent too high, and therefore, "assuming approximately 4 percent lower EBITDA based on mgt's sensitivity comments," Credit Suisse now sees the base case coverage at 0.79x and total leverage at 4.8x.

However, the firm further noted that even this conservative update may be too optimistic, "But with storage continuing to build, crude prices and volumes could deteriorate further relative to our own assumptions."

Updated Estimates

Therefore Credit Suisse lowers its 2016 estimate to the low end of guidance, lowering its 2016 EBITDA by 3 percent to $2,175 multimillion and lowering DCF by 4 percent to $1,514 multimillion. The valuation for Plains All American then comes in at $19, "based on a blend of EV/EBITDA and P/DCF" and an $8 price target for Plains GP "derived from allocating the GPs share of equity value based on the percent of the ash available for distribution (36 percent) and then multiplying by the percent of the GP that is allocated to PAGP (39 percent est for 2016) to derive $7 from the EV/EBITDA walk down and applying a P/DCF."