Company Info

Plains All American Pipeline L.P. (NYSE: PAA) is a midstream MLP (master limited partnership) that engages in the transportation, storage, and marketing of crude oil. The company and its subsidiaries own and operate an extensive network of pipeline transportation and storage assets for key oil basins.

Headquartered in Houston, Texas, the company went public in 1998 and has built and acquired a diverse set of strategic investments to become one of the biggest midstream energy companies in the United States. While recent events have caused the stock price to dip, the company’s overall health is still strong and the dip in the stock price is an overreaction. The stock price will recover, making now a great time to invest in this company.

Recent News

The company had its first quarter earnings report on May 5th, and the company was cautious about its short-term prospects due to high crude oil inventory levels. This is a result of the overall supply glut in the world economy for oil due to the Organization of Petroleum Exporting Countries (OPEC) not cutting its production in the face of increased production from the United States. Earnings for the first quarter fell 26% as a result with decreased revenues and expenses.

However, the company’s intermediate and long-term outlooks remain optimistic. It’s financial guidance for the full year was essentially unchanged, with its midpoint estimate for earnings before interest, taxes, depreciation, and amortization remaining at $2.35 billion. The stock price fell roughly 3.5% in the week after the earnings report, as investors were underwhelmed by the current results.

Things got worse on May 19th, when an oil pipeline in California ruptured and released 101,000 gallons of oil onto a Santa Barbara beach. This is 4,200 gallons less than initially thought after the oil spill, but still not a good look for the company. The stock price had gained back 3% of the losses it incurred after the earnings report, trading $49.60 before news of the oil spill was released. The stock price has now fallen another 6% since then.

Figure 1. Source: YCharts

The Stock Is Now Attractive

While the oil spill is obviously not ideal, the company will be fine in the long-term, as the one-time fines and cleanup expenses will not have a major impact on the Plains’ overall financial health. In fact, their insurance could cover a large portion of the expenses the company will incur. And according to Sunil Sibal, the director and master limited partnership analyst at Global Hunter Securities, retail investors who are more reactionary have done much of the trading of the stock after the oil spill.

On the other hand, market analysts like Sibal seem to be confident of the company’s safety record, even as the media has jumped on Plains’ past record of safety violations. The Los Angeles Times reported that the company has incurred 175 safety violations since 2006, and that only four companies of the among the more than 1,700 included in a federal database had more infractions. However, this fact is quite misleading, as Plains is one of the largest midstream operators in the nation and has many more miles of pipeline than the other companies in the database.

While the stock is currently trading down due to the bad news and reaction from investors, the health is still good, as midstream MLPs like Plains are good investments at this time. These types of companies are not as exposed to the currently volatile oil prices since they receive fees for many of their services. Furthermore, the company has plenty of exposure in the Permian, Bakken, and Eagle Ford crude oil basins.

The company is currently behind a proposed crude oil pipeline that would carry oil across Arkansas from Oklahoma to Memphis. The project will build a 440-mile pipeline that will carry oil from the Bakken Shale formation in North Dakota, transporting it from the company’s terminal in Valero, Oklahoma to a refinery in Memphis. Called the Diamond Pipeline, it will have a 200,000 barrel-per-day capacity.

The new pipeline should not be affected by the recent events in California, as it will exceed the U.S. Department of Transportation’s pipeline standards and will have a number of safety elements to make it safe. A federal agency is examining how the project will affect a number of waterways on its path through Arkansas. The project is important, as even though U.S. oil rig counts continue to fall, sweet spots in the Bakken shale formation continue to remain attractive and productive.

When oil rig counts recover, as is expected during the second half of the year, the company’s profits should grow rapidly, allowing the company to meet its goals for the current fiscal year. The company also recently acquired an oil terminal under contract in the Bakken shale and is working on pipeline expansions related to crude oil from the Eagle Ford formation in a joint venture with Enterprise Products Partners L.P. (NYSE: EPD). The ongoing business expansion shows the company’s good health during the current volatility in oil prices and falling oil rigs, meaning the company is a strong play in the energy sector at this time.

Analyst Opinion

Analysts tend to agree with the bullish fundamental analysis of the company. Citigroup, Inc. reiterated its buy rating on the stock after the oil spill on May 24th, giving the stock a target price of $55, while Deutsche Bank announced a current price target of $54. This is the lowest target price currently assigned to the stock according to Yahoo! Finance, where the company has a consensus rating of buy.

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Figure 2. Source: Yahoo! Finance

Of the analysts who have initiated coverage for the stock, the mean target price is just above $58. With the stock price currently trading around $47, this offers an upside of over 23%. This is in agreement with the strong fundamental analysis of the company, adding to the argument that with the current stock price, Plains is currently an attractive investing opportunity.

Conclusion

While the recent news surrounding the stock has clearly not been positive, now is a good time to buy the stock at a decreased value. Most of the trading of the stock has been done by retail traders as a reaction to the news, while larger investors have kept the faith with the midstream MLP. With these kinds of companies currently an attractive investing opportunity, the decreased value of the stock represents a good time to buy it, as the company has good exposure to the major shale formations and is in position to enjoy a strong second half performance. I Know First Predictive Algorithm is bullish on this stock, believing that it will recover and offer returns to investors during the second half of 2015.