Critical Acquisitions And Market Savvy Fuel Optimistic Earnings And Growth Prospects

Key Takeaways

• Focused strategy on bolt-on acquisitions and market-based opportunities in crude oil and NGL segments indicate potential for increased revenue and net margins.
  
• Shift towards fee-based contracts and disciplined capital allocation aimed at enhancing shareholder returns and stabilizing earnings.
  
• Concerns about Permian Basin sustainability, shifts towards fee-based contracts, and increased capital expenditures might strain cash flow and impact earnings.

Catalysts

Through its subsidiaries, engages in the pipeline transportation, terminaling, storage, and gathering of crude oil and natural gas liquids (NGL) in the United States and Canada.

• The company's increasing adjustments to its full-year 2024 adjusted EBITDA guidance by $75 million imply an operational efficiency or expansion in its service offerings or asset base, which can increase future revenue.
  
• Continued focus on bolt-on acquisitions, as demonstrated by the completion of 8 bolt-on transactions for approximately $535 million, indicating a strategy to enhance asset base and service capabilities, potentially driving both revenue and net margins.
  
• Leveraging market-based opportunities in the crude oil segment and favorable spreads in the NGL segment showcases the company's ability to navigate and profit from volatile market conditions, positively affecting net margins.
  
• The strategy to generate approximately $1.55 billion of adjusted free cash flow and allocate a significant portion to common and preferred distributions indicates a disciplined approach to capital allocation that can enhance shareholder returns, positively affecting earnings per share.
  
• The shift towards more fee-based contracts, especially in the NGL segment, suggests a move towards stable and predictable cash flows, which is likely to reduce volatility in earnings and support sustained growth.

Assumptions

• Analysts are assuming Plains All American Pipeline's revenue will decrease by -0.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.5% today to 1.7% in 3 years time.
• Analysts expect earnings to reach $850.1 million (and earnings per share of $1.24) by about September 2027, up from $770.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $1.3 billion in earnings, and the most bearish expecting $689 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.7x on those 2027 earnings, up from 15.9x today. This future PE is greater than the current PE for the US Oil and Gas industry at 10.1x.
• Analysts expect the number of shares outstanding to grow by 0.39% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 8.41%, as per the Simply Wall St company report.

Risks

• Growing concerns about the sustainability of the Permian Basin's production growth could negatively impact pipeline volume and revenue forecasts.
  
• A shift towards more fee-based contracts in the NGL segment could reduce volatility but might limit upside revenue potential in favorable commodity pricing environments, impacting net margins.
  
• Increased capital expenditures on bolt-on acquisitions and infrastructure investments may strain cash flow if these investments do not yield expected returns quickly, potentially affecting earnings.
  
• Renewal of long-term contracts might not be at favorable conditions due to market tightening, potentially leading to lower than expected EBITDA and impacting net margins.
  
• Reliance on continued operational efficiencies and cost management as a primary driver for beating earnings expectations could be unsustainable in the long term, risking future earnings projections if cost reduction plateaus are reached.

Valuation

• The analysts have a consensus price target of $20.44 for Plains All American Pipeline 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 $23.0, and the most bearish reporting a price target of just $17.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $48.9 billion, earnings will come to $850.1 million, and it would be trading on a PE ratio of 21.7x, assuming you use a discount rate of 8.4%.
• Given the current share price of $17.49, the analyst's price target of $20.44 is 14.4% higher.
• 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.