Plains All American Pipeline, L.P. (PAA) Earnings Call Transcript

Good day, and thank you for standing by. Welcome to the Plains All American Third Quarter 2026 Earnings Conference Call. [Operator Instructions] Please advise that today's conference is being recorded. I'd now like to hand the conference over to your first speaker today, Blake Fernandez, Vice President of Investor Relations. Please go ahead.

Thank you, Marvin, good morning, and welcome to the Plains All American third quarter 2026 earnings call. Today's slide presentation is posted on the Investor Relations website under the News and Events section at ir.plains.com. An audio replay will also be available following today's call. Important disclosures regarding forward-looking statements and non-GAAP financial measures are provided on Slide 2. An overview of today's call is provided on Slide 3, a condensed consolidating balance sheet for PAGP and other reference materials are in the appendix. Today's call will be hosted by Willie Chiang, Chairman and CEO and President; Al Swanson, Executive Vice President and CFO, along with other members of our management team. With that, I'm going to turn the call over to Willie.

Thank you, Blake. Good morning, everyone, and thank you for joining us. This morning, we reported strong third quarter adjusted EBITDA attributable to plans of $711 million. Al will provide additional details on the quarterly results in his portion of the call. Our business is operating well, and we continue to demonstrate steady growth as we executed on the three initiatives that we established at the beginning of the year. First, we closed on the sale of our Canadian NGL business in May, which completes our shift to a premier crude oil midstream company and improves the quality of our cash flow and our opportunities for growth going forward. Second, we have captured $50 million of synergies in connection with the Cactus III Pipeline acquisition. And third, we remain on track to deliver $50 million of efficiencies across the organization by year-end 2026. As we outlined on Slide 4, we have multiple levers to efficiently grow the business through a combination of organic and inorganic investment opportunities that complement our existing asset base. To further expand on the organic growth projects that we detailed in the second quarter, we're pleased to announce a 10-year agreement with the large integrated producer to further build out our Permian Midland gathering system. This new agreement includes 270,000 dedicated acres, and it provides additional growth opportunities to the POP JV, bringing our total dedicated acreage in the Permian to more than 5.3 million acres. Outside of the Permian, we successfully closed the Silver Creek acquisition, which we have renamed Silver Spur on October 1. This further expands our presence within the Powder River Basin, where substantial drilling location with attractive economics support robust producer development into the future. Silver Spur is a strategic addition to our Rockies platform. The system currently transports approximately 125,000 barrels a day underpinned by a diversified customer base and includes 915,000 dedicated acres with long-term contractual commitments. By integrating these gathering assets into our existing network, we enhance our customer offering with long-term haul connectivity to cushing, creating commercial and operational synergies that support long-term cash flow growth. During the quarter, we also took steps to optimize our balance sheet with a successful junior subordinated notes offering and the subsequent redemption of our preferred securities. Al will provide more detail, but these transactions meaningfully simplify our capital structure and are accretive to distributable cash flow moving forward. On the macro front, the geopolitical landscape remains volatile with ongoing disruptions to global oil supply and damage to energy infrastructure. Global demand has remained resilient and oil inventories, including strategic petroleum reserves continued depleting, which is supporting the crude oil futures curve. Through this environment, North America remains critical to help meet global energy needs. More specific to the Permian, we expect production growth to be towards the high end of our previous range, about 200,000 barrels a day on a year-end exit-to-exit basis for 2026. The improving natural gas egress, higher rig counts over the past 6 months, continued developments of various formations in the Permian and continued advancements in drilling efficiencies and enhanced recovery techniques should and will provide momentum into 2027. We will provide a more formal outlook for 2027 Permian growth on our call in February. With that, I'll turn the call over to Al to cover our quarterly performance and other financial matters.

Thanks, Willie. Slide 5 contains adjusted EBITDA walk that provide additional details on our performance. Please note that 3Q reporting removes the NGL segment and includes one single consolidated segment for the entire company, which aligns with the sale of our Canadian NGL business that closed in May. For the third quarter, we reported adjusted EBITDA of $711 million, reflecting the benefit of operating efficiencies, annual [ ferc ] tariff rate escalations and a reduction in environmental remediation expenses relative to the second quarter. As highlighted on Slide 6, we are on track to achieve our guidance targets for the year and narrowing the EBITDA range to plus or minus $50 million with a midpoint of $2.88 billion. Based on prevailing macro environment, we would expect to be at or slightly above the midpoint of the range for the year. A summary of 2026 guidance and key assumptions are on Slide 7. We will provide guidance for 2027 on our call in February. Slide 8 illustrates strong distributable cash flow generation. In September, we successfully raised $1.5 billion of 30-year junior subordinated notes, which mature in 2056, consisting of $700 million of 6.75% Series A notes, which are callable in 5 years and $800 million of 7% Series B notes, which are callable in 10 years. Subsequently, we used the proceeds along with cash on hand and commercial paper borrowings to redeem all of our Series A and Series B preferred units. This capital structure optimization is expected to increase annual distributable cash flow to common unitholders by approximately $60 million or $0.09 per unit while maintaining leverage within our targeted range. With that, I will turn the call back to Willie.

Thank you, Al. I'm pleased with our performance year-to-date and the continued execution on our key initiatives. Our crude oil business with a more durable and predictable cash flow stream post NGL sale really positions us well for a variety of macro market conditions. As we show on Slide 9, we continue to execute our efficient growth strategy the three announcements this quarter again demonstrate the multiple levers that we have to drive growth, including organic investments, inorganic bolt-on M&A and balance sheet optimization. We remain committed to capital discipline, maintaining a stable and flexible balance sheet and continuing to return cash to unitholders. With that, I'll turn the call back to Blake to lead us into Q&A.

Thanks, Willie. As we enter the Q&A session, please limit yourself to two questions. This will allow us to address as many questions as possible from our participants that are available time this morning. With that, Marvin, we're ready for questions.

[Operator Instructions] Our first question comes from the line of Manav Gupta of UBS.

I wanted to ask you a little bit more on the 270,000-acre Midland dedication. As you ramp towards the 225 target of volumes, how should we think about the earnings uplift that this opportunity provides.

Manav, this is Jeremy Goebel. We're going to give you more guidance on that in February. But think of that as existing production. So it's not a ramp to production. It's just a matter of timing for connection. So that contribution will likely be late 2027, early 2028 when the connection is done, but we'll give you more guidance on capital and timing next year. But we're excited about the opportunity to partner with a top-tier producer and look forward to providing those services over a long period of time and expanding our Midland footprint.

Perfect, sir. The second question I wanted to ask you, I mean, maybe I understand there's crude volatility. But what are you hearing from the producers generally in the Permian? Do they expect continue to grow production. We know the big guys, Exxons of the world, definitely want to grow. And what we are trying to solve from our side is, when does the Permian egress start to get tightened again? Is it late 2028? Is it 2029? When do you see to the point where these existing Permian pipes, even with the Cactus III expansion are like almost 90% full?

Got it. Manav, that is a great question. What I would say is the volatility you experience every day waking up and seeing a headline in crude move $8 to $10, they're experiencing the same. So from a planning perspective, I think you can expect 200,000 to 300,000 barrels a day of growth for the foreseeable future based on the activity you see today. You've added 30 rigs this year, you've gotten more efficient this year. You're just starting to add completion crews. So the 200,000 barrels a day of growth that we've seen through this year, we would expect that to continue. The pipes to the coast are close to 90% full now. I think what you would see is the total basin will grow 200,000 to 300,000 barrels a day. The basin will clear for several more years. But I think your timing is appropriate for additional brownfield expansions in that '28 to '29 time period to see additional capacity come to market. So there's no need for a greenfield large pipeline at this time based on the ratable growth that we see and the smaller number of players driving growth, it seems like it's going to be orderly and that growth will happen over that time period. But your -- sometime in 2028 to early 2029, I think you'll see additional brownfield expansions. But by and large, I think rates are constructive, dialogues constructive with counterparties. We continue to recontract the pipes that we have now and look forward to continue growing the business.

Manav, this is Willie. I just wanted to add one thing. But your question is spot on. It's very difficult to predict the exact timing of it because just of the global volatility. But as I sit back and we think about what's going on in the world, global demand has remained fairly resilient. There's a lot of noise in the supply chains. If you look at where the resources are and where the demand centers are for the world. It all points to North America really being an incremental producer. So the capacity that we've got out of the Permian is meaningful, and we've got the ability to expand Cactus III. And as we've said before, we're going to match that expansion capacity to what the demand is to get to the water, but I think it really sets up for a strong macro environment going forward, trying to analyze and pick exactly when it's going to happen is very, very difficult, but we'll be patient and we stand ready to be able to meet the needs.

Our next question comes from the line of Julian [indiscernible] of Jefferies.

Can you hear me okay?

We can hear you loud and clear.

Excellent. Look, a couple of things. Maybe just zeroing in and net picking just on the quarter itself 4Q was implied here, how do you think a little bit about just implying down? Is there any specific drag here on the -- like forthcoming quarter? And then digging a little bit more strategically to the last question here, what do you think the timing of evaluating that Cactus III expansion is vis-a-vis you talk about that '28 timeline for a brownfield expansion. When do you start moving on that, and we're getting a little bit more detail on -- I presume that that's the brownfield expansion you're getting at here.

Julian, this is Al. I'll do the first part. Implied, obviously, in our guidance is about $700 million for the fourth quarter, down about 10% from the third quarter. The real change is the market opportunities that we've experienced in 2Q and 3Q that really masked that's really driving the $10 million lower number plus the inclusion of Silver Creek for the fourth quarter. If you recall, our view is Silver Creek's an asset that's going to grow meaningfully over the next few years. 4Q included in our forecast is without the benefit of some of that growth some transition services costs, integration costs, et cetera, and without the synergies. So those two basically offset the step down in some of the market opportunity that we captured kind of as the war started for second quarter and third quarter.

Julian, for your second part, the shorter answer is we're continually evaluating them. Just as you saw this summer, we added 75,000 barrels a day we're looking at incremental ability to add as the market demands. And so I think you'll see us ramp over that time period. There are segments of pipe we have to build to access additional markets. So it's not -- I don't know that you'll see one grand announcement series of announcements to get the pipeline ready. And then as contracts and rates are appropriate, we'll add the additional capacity. So it's not -- I don't think it's going to be one step change, another 300,000 barrels a day. I think you're going to see a series of expansions that go based on market demand.

Got it. Excellent. And you picked up what I was trying to put down on that 4Q and on the Silver Creek piece and the contribution. But maybe talking about the TRB more broadly here. I mean obviously, you're acquiring here. How do you think about diversification in that geography here, post midterms, et cetera? Anything that you'd flag in terms of just this more strategic repositioning and adding on the margin maybe, but any points to complement your latest position there?

We're very excited about the Silver Spear asset. I think the Powder River Basin is one that's been candidly evaluated for over some time period, and they're just starting to figure it out. So I think it's going to ramp into 2028. We have to continue to build out the system now through 2027, but there's a series of NBCs. There's 915,000 of acreage dedications. There's 4 to 5 producers that are already telling us that the wells are better and they cost less, and they're looking to potentially add a rig into the system. So we can see the Powder River Basin as the next growth wedge in the Rockies. And that positions well for us not only on the Silver Spur asset from a gathering standpoint, but then also from a pull-through benefit to our pipelines and terminals in the Guernsey area headed south through to Cushing. So it's an integrated play for us. It's a growth on a stand-alone basis but also an integrated place. We're excited about the opportunity to work with some of our large producers that are also there.

Our next question comes from the line of Jeremy Tonet of JPMorgan Securities.

This is Francina on for Jeremy. Just wanted to zoom in a bit more on that kind of Silver Creek contribution point in 4Q. How would you kind of maybe frame or size run rate contributions and then the kinds of projects that might be incremental to kind of reach that run rate in terms of thinking about capital needs to really capture that low-hanging fruit.

So think of the fourth quarter as transition. There's a transition services agreement, which has some additional costs that will go away. So typically, it takes us a few months to shut off. So we'll go into next year it will be inside that cost of capital very quickly that our long-term run rate. So we have to -- from a there's an investment that needs to be made between now and the end of 2027. So it will really catch its legs in the 2028 and forward, like I said, a series of MVCs and acres dedication, but we'll be shedding costs, adding market opportunities doing some pull-through benefits on the asset through 2027. So that will be the transition year, and it will really -- 2028 forward will be a great thing for the asset. But it's inside of 10x when we start, and it compresses well inside of our cost of capital outside of that. So it's not -- from an EBITDA standpoint, you can think of this as roughly 9 to 10x in the first 12 months. And after that, it gets well inside that.

That's very helpful. And then I just wanted to maybe talk more broadly about the M&A landscape. A lot of your peers have taken on packages this year. And so is there anything that's remaining, anything that looks interesting at this point?

Yes. I'll go ahead and take that one. This is Willie. Clearly, we've done a lot of bolt-on M&A or bolt-on acquisitions. So I'll speak about bolt-ons and then broader activities. We've actually been the ones that have been executing on a lot of these bolt-ons. We look at everything I would tell you that I think the bolt-on opportunities are probably a little less than what the pace we've gone in the past. I think we've done 15 of these over the last 3, 4 years. So it's been very critical to our piece. A broader M&A is obviously an opportunity. But right now, we focus on our crude business. We've got -- anything we do focuses on returns. So if we think about assets that we might bring in or things we may do, it's really focused around capital discipline and returns. And it's with that lens that we think about broader M&A, but look at everything, well positioned. Opportunities come our way, we'll be able to hopefully capture them.

Our next question comes from the line of AJ O'Donnell of TPH Research.