Hot MLP Play: Plains All American
Guest Opinion
12/22/08 - 08:05 AM EST
This column was written by Douglas Skrypek, managing director and chief investment officer of Parthian Capital. He is a specialist in investing in master limited partnerships, primarily midstream energy.
I am a fan of master limited partnerships, as I have
written in the past. In this volatile market, and deteriorating economy, MLPs provide investors with a steady income, an opportunity for capital gain and a tax incentive.
One MLP worth serious consideration is
Plains All American Pipeline (PAA Quote), which handles the transportation, storage, terminalling and marketing of crude oil, refined products and liquefied petroleum gas, or LPG. The company moves more than 3 million barrels per day of these products.
Plains All American also owns a 50% interest in Vulcan Gas Storage LLC, which develops and operates natural gas storage facilities. PAA owns strategically located assets, which play a vital role in the logistical chain of both U.S. and Canadian energy supplies.
PAA's business can be broken into three units: Transportation, facilities and marketing. The transportation segment generally consists of fee-based activities involved in transporting crude oil and refined products using pipelines, gathering systems, trucks and barges.
The company gets revenue from tariffs, third-party leases of pipeline capacity and transportation fees. The facilities segment consists of fee-based activities associated with providing storage, terminalling and throughput services for crude oil, refined products and LPG, as well as LPG fractionation and isomerization services. PAA generates revenue through a combination of month-to-month and multi-year leases and processing arrangements.
The facilities segment includes PAA's investment in PAA/Vulcan. The company owns and operates approximately 26 billion cubic feet of underground natural gas storage capacity. PAA/Vulcan is constructing an additional 24 billion cubic feet of underground storage capacity, which is expected to be placed in service in stages over the next several years.
Plains All Amer Pilpeline LP
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The marketing segment's operations generally consist of the following: The purchase of U.S. and Canadian crude oil at the wellhead and the bulk purchase of crude oil at pipeline and terminal facilities, as well as the purchase of foreign cargoes; the storage of inventory; the purchase of refined products and LPG from producers, refiners and other marketers; the resale or exchange of crude oil, refined products and LPG; and the transportation of
crude oil, refined products and LPG.
Plains All American is a good buy now. The current contango in the crude oil market will allow PAA to profit from its dominant storage position in Cushing, Okla. Simply stated, contango occurs when the current futures price is trading for less than longer-dated futures.
Currently crude oil futures for Jan. 09 are $40.83 a barrel, while Dec. 09 futures are $57.10. It costs about 70 cents per bbl per month to finance and store crude, so clearly every trader with the wherewithal to do this trade will put it on.
PAA benefits in two ways from this. Traders will want to lease its tanks and PAA's marketing segment can exploit the contango itself by doing the same trades. Recently oil companies have leased supertankers to act as waterborne storage tanks to lock in contango profits. Cushing is the delivery point for the NYMEX WTI crude contract.
PAA also benefits from the importation of crude oil into the U.S. from Canada via its Rainbow, Rangleland and Manito systems, and the Gulf of Mexico via its 22% interest in the Capline system.
The company is currently constructing the Salt Lake City Expansion pipeline that will transport 120,000 barrels per day. PAA has locked in 10-year transportation contracts for this asset. PAA also has the Pier 400 project under development in the Los Angeles basin. This project would provide 200,000 barrels per day of crude offtake from marine deliveries of crude oil into the Los Angeles basin.
In July,
Occidental Petroleum Corporation (OXY Quote) purchased 10% of PAA's general partner. OXY is a large crude player with extensive holdings of midstream assets throughout the U.S. One example is OXY's presence in the Permian Basin of Texas, where PAA has a large footprint. I believe that PAA and OXY will collaborate on several crude projects in the future.
The bottom line is, PAA is an integral part of the U.S. energy supply chain. PAA currently yields 10%. In an environment where 10-year Treasuries yield 2.19% and money market funds yield 0%, I believe long-haul pipeline MLPs provide value opportunities for patient investors.
