Plains All American Pipeline L.P. PAA announced that it will issue senior notes to refinance outstanding debt. The firm intends to utilize the net proceeds from the offering to partially repay the principal amounts of $500 million 2.60% senior notes due 2019 and $500 million 5.75% senior notes due 2020 at their respective maturity dates in December 2019 and January 2020.
The balance proceeds post repayment will be utilized for general partnership purposes, which may include repayment of indebtedness, acquisitions, capital expenditures and additions to working capital, among others.
Lower-Than-Industry Debt Level
Plains All American Pipeline’s debt-to-capitalization ratio currently stands at 42.2%, lower than its industry’s average of 53.3%. Notably, the partnership is committed to lower debt level. It had reduced long-term debt from $11.8 billion at 2016-end to $9.1 billion at the end of 2018.
Proper management of long-term debt led to a 6.4% decline in year-over-year interest expenses in first-half 2019. The partnership aims at further lowering debt from the current level through divestiture proceeds and higher earnings from the fee-based business.
This operator in the oil and gas midstream space maintains a systematic capital investment strategy to expand its operations through organic growth initiatives. It currently has some new projects in resource-rich regions.
The partnership now anticipates 2019 capital budget to amount to $1.5 billion, with a major portion of the planned capital expenditure allocated to new pipeline projects and for expansion of the existing pipeline projects. The firm is working to expand presence in the resource-rich Permian Basin.
Markedly, it has formed the W2W Pipeline joint venture with the subsidiaries of ExxonMobil XOM and Lotus Midstream, LLC. The pipeline system is expected to transport more than 1 million barrels of crude oil and condensate per day from the Permian Basin to the Texas Gulf Coast. The firm has a 20% interest in the venture, which is expected to begin commercial operations from first-half 2021.
Rate Cut a Boon for Midstream Operators
After increasing rates for nine times since December 2015, the Federal Reserve lowered interest rates in July 2019 by 25 basis points to 2.25%. The Federal Reserve might cut rates again, in case the current economic conditions persist.
The rate cut could a welcome change for these capital-intensive midstream operators and allow them to borrow funds at a lower rate to complete projects.
Units of Plains All American Pipeline have underperformed its industry year to date.
Zacks Rank & Key Picks
Plains All American Pipeline currently has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Some better-ranked stocks from the same industry are TC Pipelines LP TC and Crestwood Equity Partners LP CEQP, each holding a Zacks Rank #2 (Buy).
Long-term (three to five years) earnings growth for TC Pipelines and Crestwood Equity Partners is projected at 2% and 5%, respectively.
The Zacks Consensus Estimate for the current year for TC Pipelines and Crestwood Equity Partners has moved up 1.4% and 484.5%, respectively, in the past 60 days.
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