On January 10, 2013, we downgraded our recommendation on natural oil and gas pipeline operator, Plains All American Pipeline, L.P. (PAA), to Neutral from Outperform. The partnership currently has a short-term Zacks Rank #3 (Hold).
Why the Downgrade?
The partnership’s several negative factors including commodity price volatility, strict guidelines, uncertainty in global capital and credit markets, and commodity risks in its Supply and Logistics segment due to dependence on third-party service-providers drive us to downgrade our recommendation on the stock.
Effects of these negative factors have also been reflected on the Zacks Consensus Estimates. As per the estimates, the partnership’s fourth-quarter 2012 and first-quarter 2013 earnings per unit were 67 cents and 61 cents, respectively, which were lower than the year-ago figures.
Cause for Concern
Plains All American’s cash inflow primarily depends on transportation of hydrocarbon through its network of pipelines. The reduction in demand, stringent environmental and other regulations related to hydrocarbon transportation, could ultimately lower the volumes transported through its pipelines lead to a decline in the partnership’s future cash flow.
Plains All American obtains a major part of revenue from its low-risk fee-based activities. However, the partnership may be exposed to commodity risk, which is involved with the purchase of crude oil that is carried on third-party tankers. Though it re-sells oil and locks in profit margins, this act involves payment of collateral for hedges based on the market price of crude. Therefore, volatility in crude oil pricing may negatively impact Plains All American’s volumes and margins in its logistics and marketing businesses.
In addition, global capital and credit markets have been very volatile and disruptive over the past couple of years due to economic downturn. Plains All American’s ability to grow could be constrained in the absence of regular access to the capital and credit markets as the partnership relies heavily on these markets to finance its potential acquisitions and other growth opportunities.
However, the partnership’s well-positioned crude oil pipelines and storage asset-portfolio in prospective oil producing areas may partially mitigate these negatives in the future.
Other Stocks to Consider
Besides Plains All American Pipeline, L.P., another energy-pipeline provider Boardwalk Pipeline Partners, LP (BWP) is currently performing well and currently carries a short-term Zacks Rank #1 (Strong Buy). Buckeye Partners LP (BPL), another peer of the partnership, currently has a short-term Zacks Rank #3 (Hold).
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