Matt DiLallo, The Motley Fool
5 min read
In This Article:
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Plains All American Pipeline is selling its Canadian NGL business.
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The deal will lower its earnings volatility and leverage ratio.
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It will provide the MLP with a huge windfall to allocate in growing shareholder value.
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Dividend sustainability has been an issue for master limited partnership (MLP) Plains All American Pipeline (NASDAQ: PAA) and its general partner (GP) Plains GP Holdings (NASDAQ: PAGP) over the years. The MLP has cut its distribution several times over the years due to earnings volatility and balance sheet issues, causing its GP to cut its dividend.
However, Plains All American Pipeline has taken several steps to reduce its earnings volatility and leverage ratio. Those actions have paid big dividends for investors, as the MLP has steadily rebuilt its payment level. That payout -- which yields over 8% at PAA and is more than 7.5% at PAGP -- is now growing even stronger after the oil pipeline company agreed to sell its Canadian natural gas liquids (NGLs) business for nearly $3.8 billion. It makes these high-yielding dividend stocks a lot safer for income-seeking investors.
Plains All American has agreed to sell nearly all of its NGL business to Keyera for about 5.15 billion Canadian dollars (US$3.8 billion). It will retain most of its U.S. NGL business and all its crude oil assets in Canada.
The deal has several benefits, including:
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Sharpen its focus: Plains will become even more of a pure-play crude oil midstream company.
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Reduce earnings volatility: The Canadian NGL business had direct exposure to commodity price volatility, which caused fluctuations in Plains' earnings.
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A strong exit point: The MLP is selling the business at 13 times free cash flow, which is a strong valuation.
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Enhanced free cash flow: Plains will produce more excess free cash flow in the future due to lower capital investments and taxes related to the Canadian NGL business.
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Increased financial flexibility: The MLP expects to net about $3 billion in proceeds from the sale after taxes, transaction expenses, and a potential one-time special distribution to investors to offset their tax liability related to the sale.
Following the transaction, Plains All American Pipeline will produce more durable cash flows to support its distribution payments. It expects to get 85% of its earnings from predictable fee-for-service agreements, up from 80% before the deal.
It will also have an even stronger financial profile. The MLP expects its leverage ratio to be at or below the low end of its 3.25-3.75 times target range (it was 3.3x at the end of the first quarter). Plains can use its enhanced financial flexibility to make bolt-on acquisitions, repurchase preferred units, and buy back common units.
