Bear Of The Day: Plains All American

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Energy is the singular one of the S&P 500’s 13 sectors to generate materially positive year-to-date returns, as a medley of inflationary pressures drive demand past what was thought initially to be ample supply (remember the supply glut that caused the unprecedented negative oil prices in April of 2020) and recent pressures from Russian energy sanctions have exacerbated these price constraints.

Oil & gas enterprises are getting an enormous near-term bid due to elevated near-term profits from global price pressuring supply shortages, and the conflict in Eastern Europe has magnified its globalized impact. Nevertheless, increasingly lucrative energy commodities like oil & gas will inevitably revert to their mean over time, diminishing the recent gains from legacy players.

US consumers have been making a perennial shift in consumption patterns away from antiquated dirty energy sources like oil & gas and towards clean sustainability, which is not only more economically viable from a long-run profit standpoint but aligns with growing global environmental concerns.

Plains All American Holdings (PAA), one of the largest oil & gas distributors in North America, is one such midstream oil enterprise that looks like it’s well on its way towards obsolescence after 4 consecutive quarterly disappointments which have shown a growing deficit between expectations and reality.

PAA’s increasingly conservative estimates are being missed by a growing margin, demonstrating the firm’s inability to capitalize on the spike in oil & gas prices, which has temporarily flooded profits into the energy sector. When conditions normalize (or worse begin to deteriorate) PAA’s paper-thin margins will go negative in the blink of an eye.

Of course, midstream energy players don’t enjoy the same degree of upside as E&P operations. However, with transportation & storage costs soaring alongside oil & gas (Plain’s core segments), PAA’s inability to expand its earnings is concerning, and the latest EPS miss (largest miss since 2017) expands PAA’s list of bearish qualities.

PAA’s growing underperformance between both the broader energy sector as well as the midstream niche is liable to continue expanding as conditions normalize.

Analysts have been dropping their EPS estimates across all investment horizons like hotcakes, sending PAA down into a Zacks Rank #5 (Strong Sell).

The Existential Energy Crisis

I believe there is more downside to PAA’s narrative here because the only substantiated bull case for this mid-stream player is made under the presumption that production in the Permian basin (Plain’s primary operating region) will continue to grow throughout the remainder of the decade. I view this longer-run production growth as an unlikely outcome considering the material shift consumer patterns have already adapted (sprinting away from fossil fuels), not to mention the recent scarcity of prime drilling locations in the region.  

Global supply constraints have made US oil & gas products more valuable than ever, but that won’t last forever with the world economy already making big moves to get rid of big oil.

The existential crisis of mortality that the pandemic (and its lockdowns) induced has society looking towards the health of our planet, with Millennials & Gen Z’s flooding into the public markets since the lockdowns began with a penchant for sustainability.

This next-generation cohort’s market-moving Reddit message board r/WallStreetBets (WSB) demonstrates the level of interest that the next generation of economic leaders has for the flood of new electric vehicle (EV) companies that have hit the public markets in recent years like NIO (NIO), Lordstown (RIDE), Rivian (RIVN), Lucid (LCID), and of course everyone’s favorite EV winner Tesla (TSLA).

This cohort has also had a proclivity for sustainability-focused energy sources like solar with bids for shares of Invesco’s Solar ETF (TAN), Enphase (ENPH), and SolarEdge (SEDG). Uranium stocks like Cameco (CCJ) , and Energy Fuels (UUUU) have even seen a revival from their decade-long slump, with younger retail investors flooding into the nuclear space, a key ingredient for achieving our zero-emission goal.

The world is rapidly turning away from fossil fuels, and the energy crisis in Europe has nations looking to achieve energy-independent in the next few years, with the now evident global reliance on Russian oil & gas supplies highlighting the profit-driving need for sustainable energy.

USAC has finally returned to its pre-pandemic share price levels. Still, I question its ability to maintain this buoyancy with its bottom line at risk of flipping back into negative territory while interest rates soar.

Final Thoughts

PAA’s inability to effectively capitalize on the oil boom like its midstream competitors suggests to me that this company is an archaic player in a fleeting space (Plain’s antiquated IR page tells the whole story), which does not allure me in the slightest even if it is offering up an 8% dividend.

PAA is trading at its highest forward P/E multiple since 2019 when the stock was more than double the value it’s at today, and its nominal annual dividend yield has fallen equally. This stock will continue to make these cuts and disappoint investors when the oil market finally looks like it’s turning in your favor. I’m staying clear of unadopted energy stocks at the elevated market multiple this entire bloated space has been given.

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