Analyst Note| Stephen Ellis |
Plains' second-quarter results were a bit better than management’s initial expectations, as private operators boosted volumes across its Permian assets. 2021 EBITDA guidance was increased $25 million to $2.175 billion, as higher fee-based earnings were slightly offset by weaker marketing contributions. Our current forecast is slightly higher at $2.25 billion, as we expect some incremental upside on Permian volumes and marketing contributions given the current environment. We expect to maintain our $13 fair value estimates and narrow moat ratings for the Plains entities. While Plains assets are performing well, and the Oryx transaction will not be reflected in management guidance until February 2022, the bigger story remains Plains’ capital allocation. Plains closed the sale of its natural gas storage assets on August 2, boosting its asset sales for the year to $920 million, ahead of its initial $750 million guidance. Capital spending also continues to fall another $50 million to revised guidance of $350 million for 2021 with the cancelation of the Byhalia project. These efforts mean that 2021 free cash flow after distributions has increased $200 million to $1.35 billion from initial expectations. With leverage at 3.9 times debt/EBITDA, Plains expects to spend 75%-plus of its excess cash on debt reduction with up to 25% on buybacks. Since it needs to reduce debt further to compensate for the lost earnings from the asset sales, Plains is only targeting about $250 million in buybacks this year, with about $50 million already completed. We would expect this amount would increase materially in 2022 to potentially $500 million-plus as we expect similar levels of free cash flow after distributions, and leverage would be at reasonable levels and require less cash. With the stock trading well below our fair value estimate, we see the buybacks as value accretive.