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Plains' leverage, EBITDA growth targets still worrying Wall Street

The 21%dividend cut at Plains All AmericanPipeline LP and simplificationtransaction with its general partner have not been enough to assuage concerns aboutthe oil transportation-focused partnership's leverage and longer-term EBITDA growthtargets.

The simplificationdeal with general partner Plains GPHoldings LP will increase Plains All American's long-term debt by $606million, a detail that S&P Global Ratings Director Michael Grande pointed outin an interview.

"Howmuch of the excess cash flow [from the distribution cut] will be used to pay downthe debt they just incurred? How does that stack up in 2017 … against the crudeprice environment? We have to balance the simplification against that kind of backdrop,"he said.

WhenPlains executives approached S&P Global Ratings months ago to gauge the impactof the company's consolidation plan on its credit profile, "we told them, itwill be a credit positive," Grande said. "But my gut reaction is thatit will not be a resolution right away. Longer-term, in 2017, and maybe lookinga bit into 2018, we'll evaluate whether they're mid-BBB or low-BBB."

Grandeexpressed concern about weakness in Plains' supply and logistics businesses, aswell as how its roster of upcoming projects will contribute to EBITDA growth.

Moody'sanalysts offered similar near-term concern about the partnership, forecasting adebt-to-EBITDA ratio of around 5.9x in 2016, trending toward 5.4x in 2017 as thepipeline giant brings its contracted pipeline projects online.

Whenannouncing the dividend cut, Plains reaffirmed an adjusted 2016 EBITDA guidanceof $2.175 billion. "We're building the $2.175 billion EBITDA into our leverageanalysis," Moody's Senior Vice President Terry Marshall said in an interview."What they need to do … is firm up their legacy pipeline businesses, whicharen't contracted."

S&PGlobal Ratings and Moody's have accorded Plains All American ratings of BBB andBaa3, respectively, and placed the partnership on a negative outlook.

In aJuly 11 note summarizing first impressions of the simplification and dividend cut,Credit Suisse analyst John Edwards and his colleagues said that Plains will de-leverslower than expected, but they forecast the partnership's leverage to drop below5.0x by 2018. Plains' management is targetinga long-term debt-to-adjusted EBITDA ratio of about 3.5x to 4.0x and a distributioncoverage that does not fall below 1.15x.

"Whilethis is positive, we think the market may have wanted to see higher coverage (1.3xrange) in case of volatility vs. trending tight around 1.0x in the [near-term],"Deutsche Bank analyst Kristina Kazarian stated in a July 12 note. Kazarian expectsPlains to achieve its 1.15x coverage target in 2018, but believes that its 2018EBITDA goal could be unrealistic.

Plains is targeting a $1 billion recovery EBITDA by bringingall of its assets up to full utilization when drilling picks up again. "Our thought is [that] itis not possible to fully get this EBITDA in the next 12-24 months," Kazariansaid in an interview, attributing her outlook to an excess of crude pipeline capacityover current production levels.

Marketskepticism about the sustainability of Plains' distributions has persisted for months,in spite of Plains CEO Greg Armstrong's reassurancethat a $1.5 billion convertible preferred units offering would resolve such concerns.Oppenheimer & Co. analysts calledthat issuance a "high-cost" deal.

S&P Global Ratings and S&PGlobal Market Intelligence are owned by S&P Global Inc.