Plains Gains On Acquisitions (PAA)

We’ve said before that the way pipeline companies grow is by building or buying more pipelines. In its earnings report for the fourth quarter, Plains All American Pipeline LP (NYSE: PAA) proves the point. The company reported net earnings per diluted common unit of $0.56, up from $0.47 in the same period a year ago. Revenue for the quarter totaled $5.08 billion, compared with $6.55 billion a year ago.

The largest fraction of Plains’s revenue is its marketing operations, not its pipelines. Pipeline profits grew in 2008, from $334 million to $445 million. Marketing profits fell from $269 million to $221 million. The rise in pipeline profits came as a result of the company’s purchase of the Rainbow pipeline, higher average tariffs, and a couple of other adjustments.

According to Plains, the fall in marketing profits resulted from lower margins on crude oil and natural gas liquids. The company also took an inventory valuation adjustment of $16 million and a foreign currency loss of $13 million.

The company did not provide guidance for 2009, but analysts’ estimates for the first quarter are for earnings per unit of $0.73 on $8.42 billion in revenue. That seems pretty optimistic, especially given contango in the crude oil market, and depressed market in natural gas liquids. Plains’ exposure to commodity price risk is very high, and its pipeline operations might not be able to pull a rabbit out of the hat again.

Paul Ausick
February 12, 2009