Our newest investment, Plains GP Holdings (PAGP) was a holding in our model portfolio a few years ago, and I dropped it from the recommendations list during the early pandemic days, notes Tim Plaehn, editor of The Dividend Hunter.
Each PAGP share is backed by one Plains All American Pipelines LP (PAA) unit. PAA is a Schedule K-1 reporting MLP. PAGP lets us have an equivalent investment that reports tax information on a Form 1099.
PAA is the operating company. Our PAGP shares completely match PAA, including dividend rates. We look at the PAA financial reports to understand both PAA and PAGP.
Business Overview
Plains All American operates primarily as a crude oil pipeline and storage midstream company. The company owns 18,000 miles of oil pipelines and 110 million barrels of storage capacity. Plains owns significant crude oil pipeline capacity out of the prolific Permian Basin.
Plains also operates significant midstream assets for natural gas liquids (NGLs). Assets include 200,000 barrels per day of fractionation capacity, 30 million barrels of storage, and 3,900 NGL railcars.
Financial Results and Guidance
From 2018 through 2020, Plains embarked on massive capital spending, investing $1.38 billion over that period. Investment spending dropped in 2021 to $225 million, and the company forecasts investment spending of $275 million in 2022. Because of the significant asset build-out in those earlier years, the current, more modest, level of investment will allow the company to continue to increase capacity, utilization, revenue, and profits.
For 2021, Plains generated $1.996 billion of cash flow from operations (CFFO) and $875 million from asset sales. Out of that total, $1 billion of the CFFO went to pay down debt. Distributions to investors stayed level with 2022 and required $715 million.
This year, the company forecasts CFFO of $2.2 billion. Management expects to continue to pay down debt and restart the growth of the distributions/dividends, both this year and in the longer term
Investment Considerations
In March 2020, I dropped PAGP from the Dividend Hunter recommendations list when the company cut its quarterly distribution by 50%. At the time, the business generated sufficient free cash flow to support its pre-cut dividend rate. I was not amused.
Fortunately, over the last two years, the company used the excess cash flow to pay down a lot of debt and build up a business plan of paying for growth investments only out of free cash flow. The current PAA is a much leaner, high-cash flow company compared to what it was in 2019.
After two years of paying the same dividend rate, Plains increased its dividend rate by 21% on April 6. The new rate is $0.2175 per quarter, or $0.87 per share annually. I expect this to be the start of regular, significant annual dividend increases.
Currently, PAGP yields right around 7%. I think it’s an attractive energy infrastructure addition to the Dividend Hunter portfolio. (Editor’s Personal Position: Long PAGP)
