On Aug 30, 2013, we downgraded our recommendation on oil and gas pipeline operator, Plains All American Pipeline, L.P. (PAA), to Neutral from Outperform. The partnership currently has a Zacks Rank #3 (Hold).
Why the Downgrade?
We have downgraded our recommendation on the stock primarily due to disruption at some of the operations of Plains All American Pipeline in Western Canada for high flow rates of water crossings.
Moreover, over-dependence on third-party service providers at the supply and logistics segment, delay in drilling and development activities, and higher operating costs has led us to downgrade the stock.
Cause for Concern
During second-quarter of 2013, Plains All American Pipeline’s operations were disrupted in some places of Canada due to high flow rates of water crossings. The partnership expects the discontinuation of operations to prevail in the second half of 2013, which will subsequently impact the partnership’s near-term results.
Plains All American Pipeline obtains a major portion of the revenues 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 Pipeline’s volumes and margins in its logistics and marketing businesses.
These factors also affected the Zacks Consensus Estimate. Over the past 30 days, the consensus estimate for third-quarter 2013 has decreased by 26.7% to 44 cents, reflecting an estimated decline of approximately 38% year over year.
Other Stocks to Consider
Stocks in the industry that are presently performing well include Magellan Midstream Partners LP (MMP) with a Zacks Rank #1 (Strong Buy), and Delek Logistics Partners LP (DKL) and ONEOK Partners, L.P. (OKS), each with a Zacks Rank #2 (Buy).
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