Plains Earnings: Stronger Permian Performance Leads to Modest Uptick in 2023 Outlook

Plains’ PAGP second-quarter results were good, as healthy Permian volumes and tariffs led the firm to boost its guidance toward the top end of its outlook, or around $2.55 billion in 2023 EBITDA. The change is modest, and about $50 million above our original expectations. After updating our model, our $14 fair value estimates and no-moat ratings for the Plains entities are unchanged.

Overall second-quarter EBITDA fell 1% from last year’s levels to $700 million, as weak natural gas liquids performance offset strength at Plains’ Permian assets, which benefited from higher volumes and tariffs. Lower volumes because of refinery turnarounds and the absence of the strong winter of 2022 had an impact on the natural gas liquids unit, and quarterly EBITDA was nearly half of last year’s levels at $62 million.

Plains, via its Permian joint venture, acquired the remaining 43% interest it did not own of the Northern Midland Basin gathering system from Diamondback for a net cost of $145 million. We see this deal as an immediate winner, as it is geographically very close to existing joint-venture assets, and it better aligns Plains with a critical Permian producer in Diamondback. This is a good use of capital for Plains.

In the wake of the Oneok-Magellan merger acquisition announcement, investors have refocused on the tax benefits for acquirers with master limited partnerships. Given its long operating history with a master limited partnership structure, we think Plains is at the top of the list as a potential target, as it likely has sizable tax benefits for any C-Corporation acquirer.