Plains All American Pipeline, L.P. (NASDAQ:PAA) Q2 2023 Earnings Call Transcript

Plains All American Pipeline, L.P. (NASDAQ:PAA) Q2 2023 Earnings Call Transcript August 4, 2023

Plains All American Pipeline, L.P. beats earnings expectations. Reported EPS is $0.4198, expectations were $0.21.

Operator: Good morning, and thank you for standing by. Welcome to the PAA and PAGP Second Quarter 2023 Earnings Call. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Blake Fernandez, Vice President of Investor Relations. Please go ahead.

Blake Fernandez: Thank you, Michelle. Good morning, and welcome to Plains All American second quarter ’23 earnings call. Today’s slide presentation is posted on the Investor Relations website under the News and Events section of plains.com where an audio replay will also be available following today’s call. Important disclosures regarding forward-looking statements and non-GAAP financial measures are provided on Slide 2. Highlights from the quarter are provided on Slide 3. The condensed consolidating balance sheet for PAGP and other reference materials are located in the appendix. Today’s call will be hosted by Willie Chiang, Chairman and CEO; and Al Swanson, Executive Vice President and CFO, as well as other members of our management team. With that, I will now turn the call over to Willie.

Pipeline in industrial district

Willie Chiang: Thank you, Blake. Good morning, everyone and thanks for joining us. In our release earlier this morning, we announced strong second quarter results, along with the closing of the Permian Gathering Bolt-on Acquisition on July 28th, and we provided an update on our NGL segment optimization efforts at Fort Saskatchewan. These announcements reflect meaningful progress towards executing on our full-year ’23 targets and goals. As a result, our year-to-date performance and the bulk — as a result of our year-to-date performance and the Bolt-on Acquisition, we now expect to be at the high-end of our $2.45 billion to $2.55 billion, adjusted EBITDA range for 2023. Our revised outlook also contemplates slightly lower-than-expected Permian production driven by lower commodity prices and some weather-related impacts that occurred in June and July.

A high-level overview of our updated ’23 guidance is located on Slide 4, and Al will share additional detail in his portion of the call. As summarized on Slide 5, our Permian JV acquired the remaining 43% non-operated interest in the OMOG JV from Diamondback Energy via a negotiated transaction for $225 million or approximately $145 million net to Plains’ interest, which was funded with excess free-cash flow. This further aligns us with Diamondback in the core of the Midland Basin and is consistent with our objective of capital discipline and efficient growth complementing our existing footprint. With regard to updates on our NGL business optimization, a summary of today’s announcements are provided on Slide 6. In summary, we sanctioned a 30,000 barrel a day Fort Sask Train 1 debottleneck and expansion.

We also added connectivity projects to both our Co-Ed Y-grade gathering pipeline and our Fort Sask fractionation complex, which further integrates and expands our NGL system. We entered into commercial commitments substantially increasing the weighted-average contract tenure to 10 years across our Fort Sask fractionation capacity in our Co-Ed pipeline. Overall, we expect the NGL projects to generate unlevered returns in excess of our hurdle rate on approximately $200 million of investment capital. This multiyear investment fits within our previously communicated expectations for total average annual capital growth of — capital spend of $300 million to $400 million a year net to PAA over the coming years. Lastly, we have a third party supply agreement that expires at the end of 2024, which reduces our overall frac spread exposed volumes by approximately 15,000 barrels a day.

The combination of these announcements is expected to be EBITDA neutral in 2025 and beyond in a $0.55 per to $0.60 per gallon frac spread environment with the contributions from the Fort Sask expansion associated connectivity projects and Co-Ed pipeline agreements offsetting the expiry of the NGL supply agreement. Importantly, the end result is a more predictable and durable level of fee-based earnings in our NGL segment, underpinned by long-term contracts. Additionally, we’re no longer exploring a joint-venture and a higher-cost expansion of Train 2 at the Fort Sask facility as it did not meet our required return thresholds. Before turning the call back — over to Al, I want to leave you with three messages. First, we’ve exceeded our EBITDA targets through mid-year, and we expect to be at the high-end of our full-year guidance range.

Second, we closed an attractive Permian Bolt-on Acquisition that further improves our premier — Permian footprint in an efficient disciplined manner. And third, we announced several strategic actions in our NGL segment, which will help improve the long-term durability and the quality of our cash-flow stream overtime. All of these actions align with our goals of remaining capital disciplined, generating multi-year free cash flow, reducing leverage and increasing returns of capital to our unitholders. With that, I will turn the call over to Al.

Al Swanson: Thanks, Willie. We reported second quarter adjusted EBITDA attributable to PAA of $597 million. This includes benefits from increased volumes across our systems in our Crude Oil segment. As mentioned on our last call, the NGL segment experienced lower sales volumes as a result of planned turn arounds and seasonally weaker demand. Slides 11 and 12 in today’s appendix contains walks, which provide more detail on our second-quarter performance. An overview of our updated 2023 guidance is located on Slide 7. As a result of business performance in both our Crude Oil and NGL segments year-to-date and the partial benefit of the OMOG acquisition, we now expect to be at the high-end of our full-year adjusted EBITDA guidance of $2.45 billion to $2.55 billion.

We continue to expect year-over-year growth in our Crude Oil segment driven by Permian tariff volume increases. For the NGL segment, we remain highly hedged and do not expect a material impact from the lower frac spreads or Canadian wildfires. Shifting to capital allocation, as illustrated on Slide 8, we remain committed to one, significant returns of capital to our equity holders; two, continued capital discipline; and three, reducing debt and increasing financial flexibility. For 2023, we expect to generate $2.5 billion in cash-flow from operations, $1.6 billion of free cash flow with $600 million of free cash flow after distributions available for net-debt reduction resulting in year-end leverage below 3.5-times. We will continue to self-fund $325 million and $195 million of 2023 Investment and Maintenance capital net to PAA, which is consistent with previous guidance and include the anticipated capital related to today’s NGL announcement.

With that, I will turn the call back to Willie.

Willie Chiang: Thanks, Al. Today’s results reflect another quarter of strong execution and we remain very confident in our ability to continue delivering on our goals and initiatives. Macro uncertainty continues to drive volatility in both the crude and NGL markets. However, we previously took steps to proactively mitigate this risk by entering into a combination of short-term crude contracts and hedges in the long-haul crude business, along with our substantial hedge position in our NGL business. Over the long-term, Plains remains well-positioned as North American supply will continue to be critical to meeting growing global demand. As previously outlined in our capital allocation framework, we remain focused on continuing to meaningfully increase returns of capital to unitholders through targeted multiyear distribution growth.

We have a 7.5% distribution yield, significant free cash flow generation and balance sheet strength, as shown on Slide 9. We appreciate your continued interest and support and we will look forward to providing further updates on our earnings conference call in November. 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 one question and one 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 practical in our available time this morning. Additionally, the IR team will be available to address any additional questions you may have. Michelle, we’re now ready to open the call for questions.

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Q&A Session

Operator: [Operator Instructions] The first question comes from Spiro Dounis with Citi. Your line is open.

Spiro Dounis: Thanks, operator, and good morning, everybody. First question, maybe to start with the guidance, from what I can tell you were trending probably towards the upper half of the range, even before this Bolt-on Acquisition. So I’m curious you could maybe speak to how much of that upgraded outlook is legacy operations versus the Bolt-on. It sounds like maybe there could be some puts and takes into the end of the year.

Willie Chiang: Yes, Spiro, the way I would characterize it is the Bolt-on is really a smaller piece of the amount. The transaction is expected to close here. Hasn’t closed yet. So — or actually it has closed, so it’s going be five months, but it’s predominantly over performance in the business.

Spiro Dounis: Great, that’s helpful. Thanks, Willie. Second one just going to the NGL segment. So Train 2 didn’t meet the hurdle rate. Curious maybe you can just go through some of the dynamics there and maybe what could bring that project back on to the burner here. And, then beyond what’s been announced today in Canada, anything else, you’re still pursuing around optimization there.

Willie Chiang: Yes, I’m going to let Jeremy touch on that, but I want to open with one comment on this. When you think about all the things, there’s a lot of moving parts around this whole optimization project. But the thing to think about is we always drive for the capital discipline high-return option as we think about these options. Jeremy?

Jeremy Goebel: Sure. Spiro, I think the way to think about it is, we were looking at alternatives. Chris and his team have identified some lower-cost brownfield opportunities around our Train 1 system. The comment, we were able to offer a package that between that and some existing capacity we have in the East at Sarnia, we’re able to meet our needs through doing that. So we found a substantially more capital-efficient way to get to the same place and hence our partner decided that a commercial arrangement versus a partnership was a better way to solve the problem.

Spiro Dounis: Understood. And then in terms of — anything else in terms of Canada and optimization, is it kind of different now. Or are you still more potentially in the background.

Willie Chiang: Chris.

Chris Chandler: Good morning, Spiro, this is Chris Chandler. We continue to find some pretty compelling opportunities across our system. Of course, we just talked about the opportunities in Edmonton at our Fort Sask facility. But we also have the NGL extraction plant site, Empress, outside of Medicine Hat and as Jeremy mentioned, we have some unutilized capacity at our Sarnia, Ontario fractionation facility. So we look at ways to optimize all of those and we’re making small targeted investments to further grow our business in all those areas. So I think there is a — there continues to be opportunities, and we’re excited to pursue them.

Willie Chiang: And Spiro, the way these things typically work, as you build some of these things out, you end up finding additional optimization opportunities. So it’s kind of a continuing process as we go through things.

Spiro Dounis: Great. I’ll leave it there. Have a good weekend, everybody.

Willie Chiang: Thanks, Spiro.

Operator: [Operator Instructions] The next question comes from Brian Reynolds with UBS. Your line is open.

Brian Reynolds: Hi, good morning to everyone. Maybe just as a follow-up to the guidance update. Just kind of questions around your intra-basin volumes going forward, just given the pure acquisition that took place in 2Q or whether you’re seeing any fundamental shifts in the back-half Permian volume expectations. Thanks.

Al Swanson: Okay, so I think there’s two questions there. On intra-basin volumes, the acquisition doesn’t impact us. This is a Midland Basin acquisition. So it — basically it’s something we already operate so gross volumes flow straight into Midland. There’s no intra-basin component to it. As far as, I think your second question was overall expectations for the Permian. What I would say is the first part of the year, we’re exceeding expectations. The last few months have been behind a bit. The activity so far this year has been largely in-line. I’d say it’s trending a little bit below at this point, but its productive capacity is still there to get there so it’s going be a function of timing of completions in the second half of the year.