On Friday, Morgan Stanley adjusted its stance on Plains All American (NASDAQ:PAA), downgrading the stock from Overweight to Equalweight and reducing the price target to $19.00 from $22.00. The new price target suggests a one-year total return of approximately 19.9%, which includes an 8.5% distribution yield.
The revision comes amid expectations of a slowing growth in Permian crude oil production, which is anticipated to flatten the EBITDA trajectory for the company. The oil market fundamentals are perceived to be soft, barring any significant interruptions to the global supply chain. Morgan Stanley's Crude Oil strategist projects a global supply surplus of 1.3 million barrels per day (MMBPD) by 2025.
The production increases expected in the coming year are likely to be led by major operators such as Exxon Mobil (NYSE:XOM), Chevron (NYSE:CVX), ConocoPhillips (NYSE:COP), and EOG Resources (NYSE:EOG). These companies are set to drive an estimated growth of around 200 thousand barrels per day (MBPD) by the end of 2025. This follows a forecasted growth of 222 MBPD by the end of 2024.
Over the next five years, from 2024 to 2028, S&P Global | Platts predicts a compound annual growth rate (CAGR) of 2.9% for crude oil production and 8.8% for associated gas. Despite these figures, the median cash flow break-even for the exploration and production (E&P) sector is estimated to be around $54 per barrel of West Texas Intermediate (WTI), which includes base dividends. This price level is seen as a potential trigger for more significant reductions in activity, though it is not considered the base case scenario by the firm's analysts.
In other recent news, Plains All American Pipeline reported a strong Q2 performance in 2024, with an adjusted EBITDA of $674 million, exceeding expectations. This led to an increase in the company's full-year 2024 EBITDA guidance by $75 million. Concurrently, Plains All American has extended the maturity dates of its existing credit facilities, indicating a proactive approach to managing its financial obligations.
BofA Securities has resumed coverage on Plains All American with a Neutral rating, highlighting the company's substantial exposure to the Permian Basin. The firm anticipates that the re-contracting of the company's crude pipelines could result in an approximate $200 million reduction in revenue from the third quarter of 2025 through 2026.
On the other hand, Goldman Sachs maintained a Sell rating on Plains All American's shares, keeping the price target steady at $17.00. The firm's analysis comes as the market anticipates the company's third-quarter 2024 earnings, with an EBITDA forecast of $665 million.
In parallel, Plains GP Holdings (NASDAQ:PAGP), a related entity, has entered into a promising joint venture with Oryx. Stifel upgraded the price target for Plains GP Holdings to $23.00, maintaining a Buy rating. These are among the recent developments that reflect the companies' strategic financial planning and their efforts to align with changing market conditions.
InvestingPro Insights
Plains All American's financial metrics and market performance offer additional context to Morgan Stanley's downgrade. The company's P/E ratio of 15.57 suggests a moderate valuation, while its dividend yield of 7.43% remains attractive, especially considering the 18.69% dividend growth over the last twelve months as of Q2 2024. This high yield aligns with Morgan Stanley's projection of an 8.5% distribution yield.
The company's revenue of $49.7 billion for the last twelve months as of Q2 2024 reflects the scale of its operations, though the -2.99% revenue growth over the same period may support Morgan Stanley's concerns about slowing growth. However, the quarterly revenue growth of 11.47% in Q2 2024 indicates some positive momentum.
InvestingPro Tips highlight that Plains All American's dividend payments have been stable and growing, which could be appealing to income-focused investors despite the downgrade. Additionally, the company's strong return on invested capital suggests efficient use of funds, which may help maintain profitability even in a challenging market environment.
For readers interested in a deeper analysis, InvestingPro offers 16 additional tips for Plains All American, providing a comprehensive view of the company's financial health and market position.
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