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Plains All American Beats Estimates

Zacks Equity Research

Plains All American Pipeline, L.P. (PAA) announced second-quarter 2012 operating earnings of $1.64 per unit, up 46% from earnings of $1.12 per unit reported in the year-ago quarter. This year-over-year increase was attributable to favorable growth contributed by each of the partnership’s segments. Quarterly earnings were a penny ahead of the Zacks Consensus Estimate.

On a GAAP basis, Plains reported earnings of $1.85 per unit compared with $1.13 per unit in the prior-year quarter. The difference of 21 cents between operating and GAAP earnings was due to a gain of 47 cents related to other derivative activities, a charge of 3 cents related to derivative activities, equity compensation costs of 7 cents, foreign currency revaluation charge of 10 cents and 6 cents for acquisition-related expenses.

Total Revenue

Overall revenue at Plains All American Pipeline at the end of second-quarter 2012 was $9,786 million versus $8,859 million in the year-ago period, reflecting growth of 10.5%. The year-over-year growth was driven by strong performance from Transportation, Facilities and Supply & Logistics segments. Reported quarter revenue marginally beats the Zacks Consensus Estimate of $9,784 million.

Segment Update

Transportation: Volumes from transportation activities posted an upsurge of 17% to 3,563 thousand barrels per day with operation in Basin Systems being the major contributor. Adjusted profit during the quarter rose sharply by 31% year over year. The main driver of this profit expansion was several acquisitions in late 2011 and late 2012, and higher pipeline tariffs and volumes.

Facilities: Adjusted profit at the segment climbed 31% year over year. The growth was due to capacity expansion from organic growth projects, which were completed recently, and several acquisitions completed in late 2011 and early 2012.

Supply & Logistics: Segment profit increased 63% in the reported quarter. The growth resulted from increased lease gathering volumes and margins, and positive crude oil market conditions. 

Operational Update

Total cost and expenses during the quarter increased 9% year over year to $9,324 million. The combined effect of a rise in purchases and allied costs, field operating expenses, general and administrative expenses, and depreciation and amortization charges were responsible for this hike in expenses.

In the current quarter, adjusted earnings before interest, taxes, depreciation and amortization (:EBITDA) rose to $557 million from $367 million reported in the prior year. This was mainly driven by higher-than-estimated pipeline volumes and strong performance in the favorable market conditions.

The positive effect from the revenue surge mitigated the rise in total costs, thereby boosting the operating margin of the partnership in the current quarter. Operating income increased 55% to $462 million at the end of the second quarter.

Financial Screening

Cash from operating activities during the quarter was $30 million versus $318 million in the prior-year quarter. During the quarter, the partnership invested $466 million for its acquisition purposes.      

Long-term debt of the partnership as of June 30, 2012 was $5.8 billion compared with $4.5 billion as of December 31, 2011.

Cash Distribution

The new quarterly distribution rate of the partnership is $1.065 per unit, or $4.26 per unit on an annualized basis, payable on August 14, 2012. The new distribution rate reflects quarterly growth of 1.9% and rise of 8.4% year over year.

The partnership expects to benefit from strong industry performances in 2012. It affirmed its distribution rate increase target of 8% - 9% in 2012.

Peer Comparison

Enterprise Products Partners L.P. (EPD), which competes with Plains All American Pipeline L.P., reported second-quarter 2012 earnings per limited unit of 64 cents, surpassing the Zacks Consensus Estimate of 59 cents and grew more than 25% from 51 cents a year ago.

Revenues in the quarter declined nearly 13% year over year to $9.8 billion. The revenue decline was primarily due to lower commodity prices and lower sales for petroleum products, partially offset by higher overall volumes. Quarterly revenue failed to meet the Zacks Consensus Estimate of $12 billion.

Our View

We view Plains All American Pipeline as an organization with strong crude oil pipelines and storage assets portfolio in prospective oil producing regions. Moreover, the partnership’s $1 billion investment plan in organic growth project for full-year 2012 will further enable it expand its operation to serve major U.S. refinery and distribution markets. We believe the partnership’s positional advantage will fuel its future performance.

However, we are concerned about stringent regulations and higher costs associated with offshore drilling, commodity price fluctuation, and volatile global capital and credit markets.

Plains All American Pipeline, L.P. currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.

Houston, Texas-based Plains All American Pipeline, L.P. owns assets strategically located in well-established oil producing regions, catering to major U.S. refinery and distribution markets.

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