As Plains All American Concerns Fade, Morgan Stanley Sees 20% Return

Short-term concerns over Plains All American Pipeline, L.P. PAA are fading, with the focus shifting to debt paydown, rising producer volume and growth in 2018 and 2019, according to Morgan Stanley. 

The Analyst

Morgan Stanley analyst Tom Abrams upgraded Plains All American from Equal-weight to Overweight with a $26 price target.

The Thesis

Concerns about high S&L expectations, 2018 guidance decreases, volume degradation arising from competitive pressure and funding availability have all faded, Abrams said in a Tuesday note.

With Plains All American having lowered its distribution twice, it is now in a strong position to reduce debt, the analyst said. The company's plan to reduce debt by $1.4 billion over the next five quarters shows the power of retained, distributable cash flow, he said. 

"But we also think that enterprise value can rise,not only because the firm will be derisked as debt/EBITDA moves from 4.8x at year-end 2017 to below 4x by 2020 (i.e. potential multiple expansion) but also because we expect EBITDA and DCF/unit to grow," Abrams said. 

Morgan Stanley estimates an 8-percent increase in EBITDA in 2018 and a 12-percent increase in 2019, with DCF/unit up an estimated 9 percent in 2018 and 15 percent in 2019.

After the quarter, Morgan Stanley reduced its estimates slightly, but less than feared. The firm now has greater confidence in Plains All American's funding, Abrams said. 

The oil pipeline company screens relatively well on EBITDA and DCF multiples moving toward 2020, if cash flows rise as anticipated, according to Morgan Stanley.

The Price Action

Plains All American shares are down about 30 percent over the past year.

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