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Plains All American's 'brutal reality,' poor results cause drastic sell-off

Investors fled from Plains All American Pipeline LP on Aug. 8, pushing down the partnership's valuation by as much as 20% in afternoon trading after its supply and logistics segment dragged down quarterly results and prompted executives to lower full-year guidance once again and consider a dividend cut.

The poor results and dour outlook permeated the partnership's second-quarter call, which was moved up to the evening of Aug. 7.

"The brutal reality is that the market in which our supply and logistics segment operates has changed and will likely continue to evolve," Chairman and CEO Greg Armstrong said during the call. "The negative impacts on this part of our business have been magnified by the industry downcycle and the unintended consequences of minimum volume commitments and supply shortfalls related to those commitments, as well as uncontracted capacity in certain basins. Those conditions can result and have recently resulted in our race to the bottom with respect to unit margins."

The supply and logistics segment, hurt by competition and reduced arbitrage opportunities, reported a 172% decline in segment adjusted EBITDA year over year, with a loss of $28 million. In the second-quarter earnings release, Armstrong noted that Plains expects adjusted EBITDA for 2017 to decrease 8% from the original guidance to $2.08 billion. The news created a sell-off, with the stock off by 15% shortly after the market opened. Shares closed the day down by more than 19% to $20.32.

Armstrong outlined measures that management plans to take in order to mitigate the downside, including reducing certain inventories; adjusting contracts; and, more broadly, asset sales. "We are in various stages of discussion or advanced discussions and even negotiations regarding additional sales of non-core assets and partial sales of assets," he said during the call. "The cumulative proceeds of these potential asset sales are expected to range between $400 million to $600 million."

Plains could also adjust its distribution policy to focus on fee-based cash flows. In practice, that would result in a cut to distributions. "The concept is to reset [Plains'] distribution to a level supported by [Plains'] two fee-based segments, including prudent coverage levels," Armstrong said. "Cash flows from our margin-based supply and logistics segment would be excluded from this computation."

The CEO's "illustrative" example of cutting distributions, however, did not impress Jefferies LLC analysts.

"[Management] ... considers a new policy in which cash distributions are underpinned solely by its fee-based cash flows: a reduction in its annual payout, to $1.80/unit, which would imply ~1.1x coverage using only the mid-point of PAA's 2018 fee-based Transportation & Facilities guidance," they wrote in an Aug. 8 research note. "While a useful example, we believe a cut deeper than ~18% is necessary to fully inoculate PAA from potential future market shocks."

Analysts at Tudor Pickering Holt & Co. said Plains' results could be a barometer for the broader midstream energy sector. "If past performance is an indicator, as PAA goes, so goes the midstream space," they said in an Aug. 8 note to clients. "[Second] revision to payout in just over 12 months likely to weigh on entire sector."

Plains reported $149 million of second-quarter adjusted net income available to common unit holders, or 21 cents per unit, compared to a loss of $47 million, or 12 cents per unit, in the year-ago quarter. The S&P Capital IQ consensus normalized EPS estimate for the second quarter of 2017 was 25 cents. Adjusted EBITDA for the quarter came in at $451 million, down from $474 million during the same period of 2016.