Acquisitions And Permian Growth Will Strengthen Operations In 2025

Key Takeaways

• High utilization of long-haul assets and strategic acquisitions in Eagle Ford and Delaware Basin signal an emphasis on growth and operational efficiency.
  
• Enhanced shareholder returns through increased distributions demonstrate a focus on shareholder value and financial flexibility.
  
• Potential challenges from contract resets, insurance claim rejection, and acquisition integration may limit revenue growth and affect strategic positioning.

Catalysts

Through its subsidiary, Plains All American Pipeline, L.P., owns and operates midstream infrastructure systems in the United States and Canada.

• Permian crude production is expected to grow by 200,000 to 300,000 barrels a day from the end of 2024 to the end of 2025, leading to high utilization of Plains' long-haul assets, which will potentially drive revenue growth.
  
• The acquisition of the Ironwood Midstream Energy system expands Plains' asset base in the Eagle Ford, enhancing their integrated operations and streamlining efficiency, which could improve net margins and overall earnings.
  
• Plains completed the acquisition of the remaining 50% interest in the Midway Pipeline and the Medallion Delaware Basin crude gathering business, focusing on bolt-on acquisitions that align with their efficient growth strategy, potentially increasing revenue and operational synergies.
  
• Plans to invest approximately $400 million in growth capital in 2025, mainly for infrastructure improvements and integration of recent acquisitions, are expected to support organic growth and enhance earnings.
  
• An increased return of capital to stockholders, including a 20% increase in the quarterly distribution, signals a focus on shareholder value and financial flexibility, which can positively impact earnings per share (EPS).

Plains GP Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Plains GP Holdings's revenue will grow by 4.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.2% today to 0.5% in 3 years time.
• Analysts expect earnings to reach $277.1 million (and earnings per share of $1.41) by about March 2028, up from $103.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $324.4 million in earnings, and the most bearish expecting $210 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 25.3x on those 2028 earnings, down from 39.8x today. This future PE is greater than the current PE for the US Oil and Gas industry at 12.3x.
• Analysts expect the number of shares outstanding to grow by 0.25% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.91%, as per the Simply Wall St company report.

Plains GP Holdings Future Earnings Per Share Growth

Risks

• The reset of certain long-haul contract tariffs in the second half of 2025 is expected to partially offset the growth in the crude oil segment, which could impact overall revenue.
  
• The business faces risks associated with the rejection of a $225 million insurance claim from a class action settlement, potentially impacting net earnings.
  
• The acquisition-related growth strategy is susceptible to integration challenges and unforeseen costs, which might affect net margins.
  
• Flat EBITDA guidance from past projections indicates potential limitations in significant revenue growth beyond incremental acquisitions and cost optimizations.
  
• Persistent low inventories or potential tariffs on Canadian crude could create an uncertain market environment, impacting revenue and strategic positioning.

Valuation

• The analysts have a consensus price target of $21.929 for Plains GP Holdings based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $26.0, and the most bearish reporting a price target of just $19.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $57.5 billion, earnings will come to $277.1 million, and it would be trading on a PE ratio of 25.3x, assuming you use a discount rate of 10.9%.
  
• Given the current share price of $20.75, the analyst price target of $21.93 is 5.4% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.