Analyst Note| Stephen Ellis |
We have downgraded Plains' moat to none from narrow. Midcycle ROICs have continued to decline over the past few years and even allowing for a level of recovery from COVID-19-related demand destruction, ROICs are well below our cost of capital currently and going forward. The biggest problem is that Permian takeaway pipeline capacity is closer to 8.5 million barrels per day compared with about 6 million barrels per day of current production. The overbuild is because several new pipes entered service in 2019 and 2020 just as COVID-19 destroyed demand. Now, with public oil and gas firms committed to shareholder returns, not growth at all costs, the oversupply issues become more of a long-term problem. After updating our model, our fair value estimate remains $13 for the Plains' entities.