On Friday, Morgan Stanley downgraded Plains GP Holdings, L.P. (NASDAQ:PAGP) from Overweight to Equal-weight and reduced its price target to $19.00 from $22.00.
The adjustment was made in light of a projected slowdown in Permian crude oil production growth, which is expected to flatten the company's EBITDA trajectory. The new price target suggests a one-year total return of +19.9%, inclusive of an 8.5% distribution yield.
The firm's analysis indicates that despite potential near-term geopolitical uncertainties, oil market fundamentals appear to be weakening without a disruption to global supply.
Morgan Stanley's Crude Oil strategist foresees a 1.3 million barrels per day (MMBPD) global supply surplus as we approach 2025. The majority of independent E&P companies have indicated low or no growth for the next year, with significant production increases likely to come from a few large operators.
According to Morgan Stanley's E&P team, the Permian Basin is anticipated to see an approximate 200 thousand barrels per day (MBPD) increase in crude oil production at the end of 2025, predominantly driven by major industry players such as Exxon Mobil (NYSE:XOM), Chevron (NYSE:CVX), ConocoPhillips (NYSE:COP), and EOG Resources (NYSE:EOG).
This follows a forecasted growth of 222 MBPD at the end of 2024. Over the next five years, from 2024 to 2028, S&P Global | Platts projects a compound annual growth rate (CAGR) of 2.9% for crude oil production and 8.8% for associated gas.
The report also notes that the median cash flow break-even price for the E&P sector is around $54 per barrel of West Texas Intermediate (WTI) crude, which includes base dividends. This price level is considered a threshold that could potentially lead to significant reductions in activity if reached. However, Morgan Stanley's team does not view this as the most likely scenario.
In other recent news, Plains GP Holdings LP announced amendments to its credit agreements, updating interest rates and extending the maturity dates for its revolving credit and hedged inventory facilities. These changes, involving Plains All American Pipeline, L.P. and Plains Midstream Canada ULC, are designed to align the company's credit terms with current market standards and provide extended financial flexibility.
In earnings news, Plains All American Pipeline reported a robust financial performance for the second quarter, with an adjusted EBITDA of $674 million, surpassing analysts' expectations. This led to an upward revision of the company's full-year 2024 adjusted EBITDA guidance by $75 million, now projected between $2.725 billion and $2.775 billion.
Further, the company's recent acquisitions totaling approximately $535 million have been integral to strategic growth initiatives, particularly in their Natural Gas Liquids segment. Plains All American Pipeline also plans to generate around $1.55 billion of adjusted free cash flow, allocating $1.15 billion to distributions.
In other developments, the company is set to mitigate infrastructure constraints in New Mexico with new pipelines in the fourth quarter, fostering production growth. However, the company anticipates higher cash taxes in 2024 due to income factors and repatriation of funds, expecting a decrease in 2025.
These are among the recent developments that have shaped Plains All American Pipeline's financial landscape.
InvestingPro Insights
Adding to Morgan Stanley's analysis, recent data from InvestingPro provides additional context for investors considering Plains GP Holdings, L.P. (NASDAQ:PAGP). Despite the downgrade, PAGP maintains some attractive features. The company boasts a significant dividend yield of 6.98%, aligning with Morgan Stanley's projection of an 8.5% distribution yield. This is supported by an InvestingPro Tip highlighting that PAGP has raised its dividend for 3 consecutive years, demonstrating a commitment to shareholder returns.
In terms of financial performance, PAGP's revenue for the last twelve months as of Q2 2024 stood at $49.7 billion USD. While the company faces challenges in the oil market, as noted by Morgan Stanley, it's worth mentioning that PAGP's net income is expected to grow this year, according to another InvestingPro Tip. This growth expectation could potentially offset some concerns about the flattening EBITDA trajectory mentioned in the downgrade.
For investors seeking more comprehensive analysis, InvestingPro offers 7 additional tips that could provide deeper insights into PAGP's financial health and market position. These additional tips could be particularly valuable given the complex market dynamics described in Morgan Stanley's report.
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