We are maintaining our Neutral recommendation on Plains All American Pipeline L.P. (PAA). The partnership currently has a Zacks Rank #3 (Hold).
The reiteration was primarily based on volatile commodity pricing, delay in drilling and development activities caused by stringent regulations as well as higher costs, and uncertainty in global capital and credit markets.
Plains All American Pipeline’s cash inflow primarily depends on the transportation of hydrocarbon via its pipeline-networks. Lesser demand and strict environmental regulations for hydrocarbon transportation could lower the volumes transported through its pipelines. Subsequently, these factors will lead to a decline in the partnership’s future cash flow.
However, we consider Plains All American Pipeline’s strong crude oil pipelines and storage asset-portfolio in prospective oil producing areas as growth drivers, which can mitigate these negatives.
Plains All American Pipeline’s recent organic as well as inorganic strategies continue to strengthen its exiting infrastructure. The partnership also focuses on strategic acquisitions to expand its global presence.
The partnership intends to invest $1.1 billion in 2013 for several projects, including Mississippian Lime pipeline, Rainbow 2 pipeline and Gardendale Gathering System projects. As a result, Plains All American Pipeline will be able to transport higher volume of commodities and subsequently generate more returns in the forthcoming quarters.
In addition, Plains All American Pipeline acquired BP plc’s (BP) subsidiary BP Canada Energy Company. The positive effect of the acquisition of BP assets was evident in the partnership’s fourth-quarter 2012 results.
On the flip side, global capital and credit markets have been volatile and disruptive over the past couple of years due to economic downturn. Plains All American Pipeline’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.
Other Stocks to Consider
Considering the above mentioned factors we have a modest outlook for Plains All American Pipeline. There are other stocks in the industry that show potential to outperform. These include the Zacks Rank #2 (Buy) stocks of Atlas Pipeline Partners L.P. (APL) and Delek Logistics Partners LP (DKL).
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