Pipeline giant’s stock drops on cut of payouts

The stock of Plains All American plummets by nearly 20 percent after the Houston pipeline company discloses plans to cut payouts to investors.

The stock of Plains All American plummeted by nearly 20 percent Tuesday after the Houston pipeline company disclosed plans to cut payouts to investors.

The sell-off sent the company’s stock market value tumbling by more than $3.5 billion, to $14.7 billion from nearly $18.3 billion.

Plains All American Pipeline CEO Greg Armstrong cited disappointing results in the company’s struggling storage, supply and logistics business segment, as well as concerns that Permian Basin oil is taking longer than anticipated to get to its pipelines because of the lag time in completing oil wells after they are first drilled.

Armstrong said Plains may cut its investor payments, called distributions, by about 20 percent because of the lagging business segment. That comes after Plains already slashed its payouts by more than 20 percent last year. Armstrong said Plains will review the distribution over next 60 days and reveal the plan as soon as October.

“What we’re looking to do is set it at a level we know we can sustain,” Armstrong said. “Although any reduction in distribution is painful, especially during the transition, we believe this is a prudent course of action” for long-term growth

Plains is structured as a taxfriendly master limited partnership — a format favored by pipelines businesses — that relies heavily on aggressive

growth and larger payouts, called distributions, to its investors, or unit holders. A year ago, Plains cut its quarterly payouts from 70 cents to 55 cents per unit. Armstrong said under one scenario the distribution could fall to about 45 cents each quarter.

Plains, which focuses on crude as opposed to natural gas pipelines, suffered through the oil bust that started in late 2014 and was hit again less than a year later after 2015 oil leak that covered Santa Barbara beaches in California.

Plains reported Monday that it earned a profit of $188 million in the second quarter, up 86 percent from depressed earnings a year ago.

Earnings from its storage, supply and logistics business segment were disappointing, the company said. Despite the West Texas boom in drilling activity, there’s a bottleneck in hydraulic fracturing crews needed to bring oil wells into production, so the oil is taking longer to get into Plains’ pipelines, Armstrong said.

“Completions activities of drilled wells are lagging, which has pushed back some of the volume growth for the second half of 2017,” he said.

“We’re seeing roughly a five-month lag between when a rig comes online and production,” added Jeremy Goebel, Plains senior vice president.

But don’t write off Plains just yet, analysts said Tuesday.

Darren Horowitz, an energy analyst at the financial services company Raymond James, said any cut in investor distribution appears short term, and he expects Plains’ business to improve as the oil production recovers.

Plains’ pipelines are still positioned to “capture rewards from the ongoing recovery and future growth in U.S. oil supply,” particularly in the Permian, Horowitz said.

That said, Horowitz added it wouldn’t be surprising if Plains ended up cutting its investor payouts below 40 cents a quarter for a lower but more sustainable distribution.