Plains All American Pipeline, L.P. (NASDAQ:PAA) Q3 2023 Earnings Call Transcript
Plains All American Pipeline, L.P. (NASDAQ:PAA) Q3 2023 Earnings Call Transcript November 3, 2023
Operator: Good day and thank you for standing by. Welcome to Plains All America's Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's call is being recorded. I would now like to hand the conference over to your speaker today, Blake Fernandez, Vice President, Investor Relations. Please go ahead, sir.
Blake Fernandez: Thank you, Norma. Good morning and welcome to Plains All American third quarter '23 earnings call. Today's slide presentation is posted on the Investor Relations website under the News and Events section at plains.com. An audio replay will also be available after today's call. Important disclosures regarding forward-looking statements and non-GAAP financial measures are provided on Slide 2. An overview of today's call is provided on Slide 3. A condensed consolidating balance sheet for PAGP and other reference materials are in the appendix. Today's call will be hosted by Willie Chiang, our Chairman and CEO; and Al Swanson, Executive Vice President and CFO as well as other members of our management team. With that, I will turn the call over to Willie.
A long pipeline snaking through a rural landscape - symbolizing the companies midstream energy services.
Willie Chiang: Thanks, Blake. Happy Friday, everyone and thank you for joining us this morning. Today, we reported strong third quarter results, along with the closing of 2 Permian gathering bolt-on acquisitions and the continued execution of our multiyear capital allocation framework which is focused on lowering leverage and increasing the return of capital to our unitholders. As a result of our year-to-date performance and the partial year contributions of our recent bolt-on acquisitions, we are raising our full year 2023 adjusted EBITDA guidance to a range of $2.6 billion to $2.65 billion. This reflects an increase of $50 million to $100 million from the high end of our previous guidance range a high-level overview of our updated 2023 guidance is located on Slide 4 and Al will share additional detail in his portion of the call.
As summarized on Slide 5, OMAG JV acquired Rattler Midstream's Southern Delaware Basin crude gathering system and LM Energy's Northern Delaware Basin touchdown crude gathering system for an aggregate cash consideration of approximately $205 million or approximately $135 million net Plains. These bolt-on acquisitions are expected to generate unlevered returns in line with our return thresholds of approximately 300 to 500 basis points above our weighted average cost of capital, in addition to enhancing our position in the Delaware Basin. The assets will further position the Permian JV to expand its service and offerings and extend commercial relationships with both new and existing customers. Regarding today's capital allocation update, we continue to make meaningful progress towards our goal of lower absolute debt and maintaining a strong balance sheet that can withstand various commodity cycles.
As highlighted on Slide 6, we are lowering our long-term leverage ratio target range to 3.25x to 3.75x. This is intended to be a long-term range target range where we may operate below the low range -- the low end of the range during certain periods or temporarily above the top end of the range in the event of strategic transactions with a goal of moving back into the target range on a long-term basis. We expect to exit the year below 3.5x due to a reduction in net debt of approximately $450 million which is underpinned by the repayment of $1.1 billion of senior notes in 2023. In further support of our capital allocation framework laid out in November 22, we intend to recommend to our Board a $0.20 per unit annualized increase in our quarterly distribution payable in February of 2024 as seen on Slide 7.
On an annualized basis, the distribution would increase from $1.07 per unit currently to $1.27 per unit, representing a 19% increase. I would also note the proposed acceleration and timing of our annual distribution increase which would fully increase forward from our May timing to February. This is all consistent with our objective of increasing returns to our unitholders and it reflects our continued confidence in our business which is bolstered by the benefits from the recent bolt-on acquisitions. Long term, our free cash flow generation continues to support our multiyear capital allocation framework which continues to target annualized distribution increases of approximately $0.15 per unit each year until reaching a target common unit distribution coverage of approximately 160%.
With that, I'll turn the call over to Al.
Al Swanson: Thanks, Willie. We reported third quarter adjusted EBITDA attributable to PAA of $662 million. This reflects the benefit of annual tariff escalators, higher volumes in regions outside of the Permian, contribution from recent bolt-on acquisitions and the benefit of market-based opportunities. These were partially offset by lower-than-expected Permian volumes due to weather-related impacts on gas processing capacity and field compression issues that ultimately impacted oil production and extended into the middle of August. The NGL segment benefited from stronger regional basis differentials and additional spot opportunities on both propane and butane, resulting in higher realized frac spreads. Slides 12 and 13 in today's appendix include walks which provide more detail on our third quarter performance.
A summary of our updated 2023 guidance is located on Slide 8. As a result of strong year-to-date business performance in both our crude and NGL segments and the contributions from our recent bolt-on acquisitions, we are raising our full year 2023 adjusted EBITDA guidance to $2.6 million to $2.65 billion. Our updated outlook factors in lower-than-expected Permian production, predominantly driven by the weather-related impacts. We continue to expect year-over-year growth in our crude oil segment driven by tariff volume increases and tariff escalation. For the NGL segment, we remain highly hedged and expect a typical seasonal step-up in sales as we enter the winter months. Shifting to capital allocation, as illustrated on Slide 9. For 2023, we expect to generate $2.45 billion in cash flow from operations and $1.45 billion of free cash flow which takes into account the cash outlay for our recently announced bolt-on acquisitions.
This results in $450 million of free cash flow after distributions available for net debt reduction. We continue to self-fund $325 million of investment capital net to PAA which is consistent with previous guidance. We have increased our maintenance capital budget by $15 million to $210 million net to PAA for 2023. This reflects additional maintenance capital for recent bolt-on acquisitions and higher integrity maintenance activity for the year. Before turning the call back to Willie, I wanted to share a few directional comments in 2024 with formal guidance to come early next year. We continue to expect growth in our crude oil business primarily driven by operating leverage, continued Permian growth, tariff escalation and full year contributions from bolt-on acquisitions.
In our NGL segment, we have seen volatility in frac spread but have made meaningful progress in hedging over 2/3 of our expected 2024 frac exposed volumes at a spread above $0.60 per gallon. Additionally, we should benefit from the absence of planned turnaround activity next year which negatively impacted commodity exposed volumes in 2023. With that, I'll turn the call back to Willie.
Willie Chiang: Thanks, Al. Before finishing today's call, I want to reiterate a few key messages. First, current global events have highlighted and reaffirmed the importance of hydrocarbons in everyday life. Plains remains very well positioned as North American supply will continue to be critical to global energy security, affordability and reliability. Secondly and importantly, our business remains strong. We continue to execute our strategy of generating meaningful cash flow, maintaining capital discipline, reducing leverage and increasing return of capital to our unitholders. And lastly, we continue to have confidence in our business which is built on an integrated flexible asset base with operating leverage across our system.
We appreciate your continued interest and support and we look forward to fielding your questions as well as giving you further formal updates on our earnings call for 2024 in February. With that, I'll turn the call over to Blake to lead us into Q&A.
Blake Fernandez: Thanks, Willie. As we enter the Q&A session, please limit yourself to 1 question and 1 follow-up. For those with additional questions, please feel free to return to the queue. This will allow us to address questions from as many participants as possible and are available time this morning. Additionally, the IR team will be available to address any additional questions you may have. Norma, I believe we're ready to open up the call to questions.
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