One of the sectors that has seen an impressive rally since late 2020 is the Energy sector. As measured by the U.S. Energy iShares ETF (IYE), the sector has increased from a trend low point at the end of October by more than 100%. Much of that increase was driven initially by a push among major oil-producing countries, led in particular by OPEC, to curb production and so restrict supply consistent with generally reduced pandemic-driven demand; since April, the industry has used White House-driven initiatives to curb production and transportation capacity to push above initial highs established in March.
Even while COVID-19 will continue to be an issue throughout the year, there has been enough progress seen in terms of vaccinations and reduced infections and hospitalizations for states to ease restrictions on social gatherings and activities and for much of corporate America to begin shifting workplace models again from the all-in, work-from-home remote basis to back-in-office or some hybrid mix of the two. Along with indications that travel demand is increasing, that means that the production limitations just mentioned are also being seen as tailwinds for the price of oil. The interesting thing is that, despite the industry’s strong performance, a number of stocks in the industry have lagged the rest of their brethren and continue to offering interesting bargains.
One of the companies in this industry with one of the most interesting fundamental profiles is Plains All American Pipeline, L.P. (PAA). This is a mid-cap company with pipeline transportation, terminaling and storage facilities, largely in the oil-rich Permian Basin area. That puts the company right in the middle of pre-pandemic capacity limitations that put a lot of inventory last year sitting in the Basin waiting to be transported to terminals in the Gulf of Mexico. PAA is one of the companies involved in a number of the projects to improve existing pipeline, terminal and storage infrastructure, some of which are online, with management projecting up to one million barrels per day to the Gulf Coast from just one of those pipelines in the first half of this year. While political uncertainty remains high, and COVID isn’t completely going away this year (many states in the U.S. are seeing increasing infections among unvaccinated individuals from variants that have made their way into the U.S.), the stock has rebounded with the rest of the industry from a September low around $5.50 to its current price a little above $11. Is the company’s fundamental profile strong enough to suggest that it is also a good value? Let’s find out.
Fundamental and Value Profile
Plains All American Pipeline, L.P. owns and operates midstream energy infrastructure and provide logistics services for crude oil, natural gas liquids (NGL), natural gas and refined products. The Company operates through three segments: Transportation, Facilities, and Supply and Logistics. The Company’s transportation segment operations consist of activities associated with transporting crude oil and NGL on pipelines, gathering systems, trucks and barges. Its Facilities segment operations consist of activities associated with providing storage, terminaling and throughput services for crude oil, refined products, NGL and natural gas, as well as NGL fractionation and isomerization services and natural gas and condensate processing services. Its supply and logistics segment operations consist of the merchant-related activities, including the purchase of the United States and Canadian crude oil at the wellhead, the bulk purchase of crude oil at pipeline, terminal and rail facilities. EPD has a current market cap of about $8.1 billion.
Earnings and Sales Growth: Over the last twelve months, earnings decreased by about -54.55%, while revenues were 1.38% higher. In the last quarter, earnings declined by -13.79% while sales increased by 40.58%. The company’s margin profile saw material deteriorations in 2020, which isn’t surprising given the collapse in oil demand, but appears to have turned a corner this year and is getting stronger; Net Income as a percentage of Revenues in the last quarter was 2.9% versus 5.03% over the last twelve months.
Free Cash Flow: PAA’s free cash flow is healthy, at $1.17 billion. That translates to a healthy Free Cash Flow Yield of 14.13%. It is worth mentioning that Free Cash Flow declined from $1.3 a year ago, but otherwise marks a multiyear improvement from $730 million at the end of 2015.
Debt to Equity: PAA’s debt to equity is 1.2, which indicates a high degree of leverage. Liquidity is a bit of a concern, since their balance sheet shows just $56 million in cash and liquid assets versus $9.3 billion in long-term debt (with no near-term maturities). If Net Income can continue to improve on a quarterly basis, the argument that the worst is behind the company becomes much stronger.
Dividend: EPD’s annual divided is $.72 per share (reduced in 2020 from $1.44 per share), which translates to a much larger-than-normal yield of about 6.33% at the stock’s current price.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but I like to work with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term, fair value target around $15.75 per share. That means the stock is nicely undervalued right now, with 39% upside from its current price.
Technical Profile
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: The chart above covers the last year of price activity. The red line traces the stock’s upward trend from the beginning of October 2020 at around $5.20 to a peak earlier this month at around $12.50. It also provides the baseline for the Fibonacci retracement lines on the right side of the chart. The stock has dropped a little over $1 from its peak, with current support sitting at around $11, and resistance at $12.40. A drop below $11 could see downside to about $9.50, inline with the 38.2% retracement line and consistent with pivot activity seen in December of last and March of this year. A push above $12.40 should have about $2 of near-term upside based on the distance from that last resistance break in May to the stock’s peak at $12.40.
Near-term Keys: PAA has a significant amount of bullish momentum going on right now, which means that if you’re looking a short-term trade, a push above $12.40 could be a good signal to think about buying the stock or working with call options, using a price target at around $14.50. A drop below $11 could provide a good signal to consider shorting the stock or buying put options, with $9.50 acting as a reasonable near-term profit target. I think that the stock’s fundamentals – especially improving Net Income – and value proposition really offer the best probabilities of success, especially over the long-term. Even though it was reduced in 2020, this is also a stock with an annual dividend far above the average for stocks in the S&P 500 or even long-term bond yields. If you aren’t afraid to tolerate the potential for continued near-term price volatility, PAA is a hard stock to ignore.