The equity market values of oil pipeline companies Plains All American Pipeline (PAA 1.49%) and Plains GP Holdings (PAGP 1.27%) have plunged more than 60% this year. While the oil market downturn has impacted operations, the combined company's earnings have held up much better than its stock market value. Because of that, it's launching a $500 million repurchase program to start gobbling up some of their beaten-down equity.
Holding up relatively well
Plains All American Pipeline -- the sole asset of Plains GP Holdings -- recently reported its third-quarter results, which were under some pressure from the challenges facing the oil market. Overall, adjusted EBITDA declined by 7% during the period while distributable cash flow was flat. That came in slightly ahead of the company's expectations due to better performance at its transportation and facilities segments as oil volumes have come back a bit quicker than initially expected.
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Because of that and the improving conditions in the oil market, Plains increased its full-year outlook for adjusted EBITDA to roughly $2.58 billion, 3% higher than its most recent forecast. While that would still put its results 20% below last year's excellent showing, that's partially due to the $450 million of asset sales the company has completed this year to shore up its balance sheet and fund expansion projects.
Too cheap to ignore
Plains All American expects the oil market's current challenges to spill over into 2021. As of right now, the pipeline operator estimates that its adjusted EBITDA will fall another 15% next year to about $2.2 billion. However, that's partially due to the recent sale of $250 million in storage terminals and the expectation that it will sell more than $600 million in assets next year.
One reason Plains plans to sell more assets is so that it can take advantage of the huge decline in its market value. Here's what CEO Willie Chiang had to say in the third-quarter earnings press release:
Our current equity valuation does not reflect the strength of our asset base or the long-term durability of our business, and we have reached an inflection point where we expect to generate meaningful levels of Free Cash Flow after distributions. Given the combination of these factors, today we announced a $500 million common equity repurchase program to be used as an additional method of returning capital to investors. In addition to reducing debt, we believe it is appropriate to allocate a portion of our Free Cash Flow after distributions to invest in our equity.
Overall, Plains expects to generate $300 million in excess cash next year after covering its remaining expansion projects and paying its 11%-yielding dividend. Add in the planned asset sales, and it anticipates having more than $900 million of financial flexibility next year. While it will allocate a majority of that money to further strengthen its balance sheet, it also plans to use some to buy back its beaten-down equity, either at the Plains All American or Plains GP Holding level. To put the repurchase program's size into perspective, Plains has a combined market cap of roughly $6.5 billion, implying that it could retire as much as 7.7% of its outstanding equity.
With that repurchase program, Plains is joining a growing list of pipeline companies that are allocating some capital to buy back their beaten-down equity. They believe share repurchases are a better way to return money to investors instead of increasing their already sizable dividends.
Putting its money behind its belief
Plains believes there's a growing disconnect between its stock market value and its oil pipeline operations' cash-generating capability. Because of that, it plans to start buying back some of its beaten-down equity. It hopes that this will help boost its valuation, which could enable investors to earn lucrative total returns from here when adding in its high-yielding dividend.
