Plains All American Pipeline’s Permian assets and new projects

Avik Chowdhury

Rising production benefits midstream MLPs in the Permian Basin (Part 5 of 8)

(Continued from Part 4)

Plains All American Pipeline’s assets in the Permian

Plains All American Pipeline LP (PAA) is a master limited partnership that provides energy infrastructure and logistics services for crude oil, natural gas liquids (or NGLs), natural gas, and refined products. The company connects the key crude oil–producing and NGL-producing hubs and major market hubs in the United States and Canada. The company owns 16,900 miles of crude oil and NGL pipelines and gathering systems and had 24 million barrels of pipeline throughput for 2013.

PAA’s assets in the Permian

PAA owns and operates three pipeline systems in the Permian Basin. The Basin Pipeline System, in which PAA has an 87% interest, transports crude oil from the Permian Basin to Cushing, Oklahoma, for further delivery to Mid-Continent and Midwest refining centers. Net capacity attributable to PAA in the 520-mile pipeline ranges from 125,000 barrels per day to 392,000 barrels per day.

In 2013, PAA announced a project to increase capacity on the segment from Jal, New Mexico, to Wink-Hendrick, West Texas, from 125,000 barrels per day to 208,800 barrels per day. This is scheduled for completion in 2014. The Mesa Pipeline System (PAA has 63% interest) transports crude oil from Midland to the connecting carriers at Colorado City through the Big Spring refinery in Texas. It had system throughput of approximately 206,000 barrels per day in 2013. The Permian Basin Area Systems is a pipeline receiving oil from wellheads for delivery to the Basin system at Jal, Wink, and Midland as well the terminal facilities in Midland. The combined throughput on the Permian Basin area systems totaled ~581,000 barrels per day in 2013.

PAA’s capacity in the Permian

As of December 31, 2013, PAA’s transportation capacity was 1.4 million barrels per day in the Permian Basin. The company has 3,550 miles of pipelines and 8 million barrels of storage capacity in the region. It also has around 100 truck injection centers in the Basin. In 2013, the PAA’s Permian Basin operations accounted for ~44% of the average volume per day and ~28% of system miles for the company’s domestic operation.

PAA’s projects in the Permian

Recently, PAA has announced several new projects to increase and expand its Permian Basin infrastructure to support crude oil production growth. These projects are expected to complete in stages throughout 2014 and early 2015.

The Cactus Pipeline is a new 310-mile crude oil pipeline extending from McCamey to Gardendale, Texas, to provide 200,000 barrels per day (which, based on shipper demand, may increase to 250,000 barrels per day) of additional takeaway capacity from the Permian Basin. The project is expected to cost $440 million.

PAA is investing approximately $475 million to de-bottleneck the Delaware Basin (in the Permian Basin) and the southern portion of the Midland Basin. These projects will increase pipeline capacities in Southeastern Mexico and the Delaware Basin by approximately 350,000 barrels per day. They will increase the southern portion capacity of the Midland Basin by over 200,000 barrels per day. The company is also building a new 62-mile crude oil pipeline with 200,000 barrels of takeaway capacity from the South Midland Basin to the origin of the Cactus Pipeline at McCamey.

PAA management’s views

Commenting on the company’s investment plans in the Permian, Harry Pefanis, president and chief operating officer, said, “We continue to add projects in our most active area, the Permian Basin. Including the Cactus Pipeline we expect to invest approximately $1.1 billion in the Permian with approximately $800 million expected for 2014.”

An unfavorable price differential in crude oil hurts PAA

The primary reason the company didn’t increase its EBITDA forecast for 2014 was the moderate outlook for the Supply and Logistics segment business and lack of weather-related gains for the rest of 2014. For the past several years in the Unites States, the demand and supply imbalance of energy has largely been caused by infrastructure bottlenecks caused by a lack of pipeline takeaway capacity. Companies like PAA, which are active in the midstream pipeline, storage, terminaling, and related business, have benefited from this situation.

Price differentials and backwardation

Historically, the difference in crude oil grade is caused by the divergence between readily available supplies of light sweet crude oil and increased refinery demand for heavy sour crude oil. However, as various midstream companies started adding to the infrastructure, the advantage PAA enjoyed has gradually come down. The imbalance increased the volatility of historical differentials for various grades of crude oil and also impacted the historical pricing relationship between NGLs and crude oil. Even though the company experienced higher crude oil lease gathering volume in 1Q14, there were fewer opportunities to capture favorable location price differentials.

Plus, storage facilities in general faced backwardation, when current or spot prices are higher than futures oil price, which means less incentive to store oil. This was due to very cold weather during the first quarter of 2014. These factors are expected to keep the outlook for PAA’s Supply and Logistics business subdued for the rest of 2014.

Midstream Permian companies

The midstream energy companies that engage in the transportation and logistics of crude oil and natural gas have been very active for the past five years as a result of increasing production in the Permian Basin. The master limited partnerships in the midstream space that have benefited the most from the shale boom include Enterprise Products Partners LP (EPD), Sunoco Logistics Partners LP (SXL), Magellan Midstream Partners (MMP), and Energy Transfer Partners (ETP). These are components of the Alerian MLP ETF (AMLP).

Continue to Part 6

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