One of the interesting things about investing is the way the community of investors interacts and shares information. As competitive as the market can be – everybody trying to find their own respective edge, or advantage that an investing system can provide – people are remarkably willing to share information. Why? Because the truth is that the market is more than big enough for everybody that wants to participate, no matter whether you’re a small investor new to the market or a long-time, experienced trader or institutional investor.
Last week I attended a local college football game. I struck up a conversation with one of the people in the stands with me in between quarters and we started talking about what we did for a living. Turns out that he was a long-time investor like me, and when we compared notes, our methods shared a number of elements in common. I shared my view that many of the best valuations in the market right now come from the Energy sector, and he enhanced my view by pointing me towards a few stocks in the Oil & Gas Storage and Transportation industry.
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 capacity limitations that have led to inventory sitting in the Basin waiting to be transported to terminals in the Gulf of Mexico. PAA is one of the companies working on a number of projects to improve existing pipeline, terminal and storage infrastructure that are expected to come online in 2020. Those limitations have kept WTI prices relatively subdued for most of the past year. As capacity improves to keep up with high production that has continued to run at high levels in the Basin, WTI prices are forecast to increase as demand and supply finds a point of equilibrium. That generally means that companies like PAA should be among the best long-term opportunities available in the entire Energy sector.
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 $12.7 billion.
Earnings and Sales Growth: Over the last twelve months, earnings decreased by about 20.3%, while revenues declined almost -10%. in the last quarter, earnings declined to a little over -22.3% while sales dropped about -4.5%. The company’s margin profile is healthy, but narrowed in the last quarter, as Net Income as a percentage of Revenues in the last quarter was 5.69% versus 8.95% over the last twelve months.
Free Cash Flow: EPD’s free cash flow is healthy, at $2.4 billion. That translates to a modest Free Cash Flow Yield of 18.8% and marks a steady, multiyear improvement from $730 million at the end of 2015.
Debt to Equity: EPD’s debt to equity is .89, which is a little higher than I prefer to see; however the company’s balance sheet indicates operating profits should be adequate to service their debt. Liquidity is a bit of a concern, since their balance sheet shows just $461 million in cash and liquid assets versus $9.5 billion in long-term debt; however it should be noted that liquidity has improved markedly; at the end of 2018, cash and liquid assets were just $66 million.
Dividend: EPD’s annual divided is $1.44 per share, which translates to a much larger-than-normal yield of about 8.25% 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 one of the simplest methods that I like uses the stock’s Book Value, which for EPD is $14.82 and translates to a Price/Book ratio of 1.178. The stock’s historical average Price/Book ratio is 1.732, which puts the stock’s long-term target price at about $25.66 per share – 47% above the stock’s current price. The stock is also trading almost 57% below its historical Price/Cash Flow ratio, which offers a target price a little above $27 per share.
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 two years of price activity. The red line traces the stock’s downward trend from August of last year from a peak at around $28 per share to its current price at a multiyear low around $17.50. The stock’s current momentum is strongly bearish, with the price dropping below a previous two-year low around $18.50 per share. At this point, the next most likely support level is around $15 per share, with resistance at the list pivot low at around $18 per share. A break above $18.50 should give the stock room to run to somewhere between $20 and $21, which would also mark a useful signal the current downward trend is about to reverse. Otherwise, the trend should be expected to continue until the stock reaches $15, at which point it may begin to stabilize.
Near-term Keys: Given the strength of the stock’s current bearish momentum, I think there is a stronger likelihood the stock should continue to drop; that means that the highest probability short-term trade is by shorting the stock or working with put options. However, if the stock does find a stabilization point, and manages to push above $18.50, there could be a useful short-term opportunity to buy the stock or work with call options with an eye on $21 as a bullish target. The stock’s fundamentals and value proposition are excellent, which means that even with the currently bearish momentum, PAA offers an excellent long-term opportunity, 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 some additional near-term price volatility, PAA is a hard stock to ignore.