Plains GP Holdings, L.P. (PAGP) Earnings Call Transcript & Summary

Good morning, everyone. Thank you for joining us. We are very excited to be joined by Plains All American this morning, and we have CEO, Willie Chiang, who has been CEO since 2018 and before joining Plains in 2015, had a very distinguished career in Occidental [ Incorp ]. So Willie, thank you very much for joining us. And so we'll step right into Q&A here at this point for our discussion.

And so towards the end of last year, at the beginning of this year, commodity prices were moving up and then the Ukraine conflict happened and there's been a touch of volatility since. And so just wondering for your thoughts on what this says about the importance of hydrocarbons and how does this impact U.S. shale production?

Well, Jeremy, thanks, and hi, everyone. It's great to see everybody, and I haven't been here for the full conference, but it sure seems like there's been an interesting vibe and probably the comment I would make is that the vibe is really around how important our industry is. I'll answer the question, but if I could make a couple of comments. I was just in Washington, D.C. the last couple of days. And through one of our lobby groups met with the Department of Energy as well as EPA. And I just thought I'd share some of the insights on that. In a perverse way, I actually think what's happening in the world right now is, in some sense, good because there's so many people that don't understand how energy -- the importance of energy and what it does for the entire world. And I think in a very negative sense, people are going to start seeing that because the volatility is unbelievable. I don't think we've seen the worst of the situation yet because the sanctions on Russia haven't fully kicked in. I think people have grossly underestimated the supply chain lines to be able to get Russian crude to end markets. And the importance of that is North America, and particularly the U.S. and the Permian Basin is really going to be very critical in meeting crude oil demand in the world. And we shared this with the -- both agencies. And I think they understand it. But quite frankly, the rhetoric is around midterm elections and gasoline prices, and that was a focal topic of a lot of discussions. But I think beyond that, I just think that the world and the U.S. is going to understand a lot more about energy and the importance of it. So more thoughts on how that impacts Plains. If you believe that hydrocarbon is going to be around for a long time, right? And we do, crude oil and specifically, it's going to be around for decades. And every outlook and assessment on crude oil demand going forward, even in the most severe scenarios has crude oil being a piece of it. And anywhere from 40 million to 60 million barrels a day versus the 100 million barrels a day in a worst-case scenario if you're able to shift to many, many different alternatives. And why is that good for Plains? Actually, I should say, why is Plains good for the energy scenario is we're big in the Permian, right? And the Permian Basin is really going to be the growth engine, I think, of the U.S. It's probably 80% of the growth over the next number of years. We have an outlook on the Permian Basin of growing 600,000 barrels a day per year going forward, and I would probably put some emphasis on the plus side on that. We haven't updated our guidance, but we will later this year and share that with everyone. It's very critical. And with that Permian position comes a responsibility to move those barrels ultimately to the coasts and ultimately to the global market. So I think it bodes well for us as far as being able to move the volumes and the higher price environment has certainly helped us. As far as our business, our natural gas business up in Canada with frac spreads, let me just stop there.

Got it. That's very helpful. And given that backdrop, maybe picking up on that a bit more, just curious how your producer customer conversations have been progressing at this point, particularly as it relates to your expectations entering this year. I mean it seems like with commodity prices at these levels, everything in the country is economic, but I guess maybe there's OFS constraints there that play into this. But just curious, I guess, producer customer activity.

Well, clearly, the private producers have been more active than the public companies. The public companies have been under a lot of scrutiny, sometimes a little bit flippant, but scrutiny on discipline and held a line. I got the question back to the DC visit on what could the government do as far as supply chains, removing supply chain constraints to help grow and support more production. And my comment back to them was sending a strong signal that hydrocarbons have to be a key part of any transition that we might have. I even hate calling it a transition because I think it's an evolution. Because I think the bigger issue on producers right now is just holding the line with uncertainty of where the policy may go with commitments they have to make. And when I talk with my fellow CEOs on the E&P side, a lot of this can be solved with money, but more importantly, with commitments. And they're looking at [ 2-, 3-, 4-, ] 5-year commitments on drilling rigs, completion crews, costs are definitely higher because we had a lot of services that left the sector during the challenging times, but I think stronger policy statements around hydrocarbons is probably the bigger issue that allows the public folks to be able to do more.

Got it. That makes sense. And just wanted to talk about domestic production growth, and you touched on that a bit before, the 600 a day out of the Permian. How -- what type of duration, I guess, do you guys see for that growth? And if you think about the other basins out there, where else do you see growth just trying to think through the whole picture and how that impacts Plains?

Well, the Permian is 80% of the growth going forward. And again, we see 600,000 barrels a day a year over a number of years to the point where we get to what we expect 7 million barrels a day plus in the Permian in 2025, '26. I think there's an opportunity set for that to accelerate a little bit beyond the 600 plus, but we'll update that once we update our guidance. Other basins that are -- we're seeing more activity that could be the Eagle Ford, DJ, the Bakken and most other basins within the U.S. are pretty flat or not materially up.

Got it. Got it. That makes sense. And so given this backdrop in its entirety and volatility we see out there, just wondering if you could walk through, I guess, for Plains, some of the tailwinds, some of the headwinds as you see in this environment.

Well, the tailwinds have certainly been higher oil price environment for us. For us, we have what we call pipeline loss allowance, which is volumes that we're able to sell. And at a higher price, that benefits us the frac spread environment in Canada. It helps us because frac spreads are NGL liquids minus gas price and NGLs typically follow the liquid price and that was really behind our $75 million updating guidance for the outlook for 2022. And of that $75 million, roughly $50 million was NGL and $25 million was in the crude side.

Got it. That makes sense. And so diving into the Permian assets a bit more and thinking about -- there's different competitive dynamics, right? As it relates to gathering, intra-basin, long-haul pipes. Just wondering if you could walk us through how you see those dynamics, the competitive position there, competition and just any thoughts on how those different segments look?

Well, for those that if you don't know our footprint in the Permian, we have an integrated business model there. So we've got -- as I think about it, it's gathering, intrabasin and long haul, as you pointed out, Jeremy. But more importantly, we buy about 1 million barrels a day of crude every day. And through the buying and we sell it, of course, you buy it, you got to sell it to an end user. So we think that's a differentiator for us because it gives us insight to both the producer activity as well as refiners. And that business has fared well for us over a number of years. On the gathering side, we did the joint venture with Oryx recently, and that has panned out very well for us. It was a -- it's a 65-35 joint venture, 65% Plains, 35% Oryx, and we operate it. And the benefit of that is it really gives us a great footprint to be able to aggregate barrels and move it through the system. When you think about our calling card as we talk with our partners and customers, it's aggregation of the barrel, it's reliably moving it to a market, preserving the quality. We've got a very complex system that's got a lot of capabilities for segregation, blending of different types of crude. And most importantly, we offer access to multiple markets. And so that's the footprint. So on the gathering side, the numbers are pretty staggering. We've got 4 million acres of dedication to our system. Roughly half the rig count today in the Permian is on our acreage. If you look at the -- the volumes that we talked about, the roughly 600,000 barrels a day outlook in the Permian. Our outlook for volumes that the joint venture is going to gather this year is just under 300,000 barrels a day. So that starts the value chain. And then, of course, we can get into the intrabasin system that goes to many different hubs to be able to export to long-haul markets, up to Cushing down to Corpus Christi and Houston, and we've got long haul also that goes to those markets. And what we've seen is right after COVID, obviously, there was a lot of spare capacity. It was an incredibly competitive market because the midstream sector, including Plains had built to stay ahead of our -- ahead of the producer community. And when you have that kind of a setback on demand, lower activity, I think most people understand that you get a reset in production -- and you can never get back on that line. You may have the same slope, but it ended up with a significant amount of capacity that was out there. But with the growth that's starting now, we're starting to see forward markets tighten up a bit. And what I mean by tighten is the spreads between Midland and the coast are starting to widen out, which justifies shipping barrels to the export markets. And just to give you a perspective of the dollar value, it was roughly $0.40 spot volumes, $0.40 a barrel tariffs for spot volumes over the last number of years, and that has improved. The forward market is about $0.80 for 2023 and is about $1.20 2024. So frankly, pipeliners, you need to be able to justify your investment. And when you think about investments, you can't justify it on a $0.40 spot tariff. We have longer tariffs when we sanctioned the project commitments through MVCs or minimum volume commitments or acreage dedication, but the spot volumes were very, very short at the time. And now we're starting to see a little bit of a healthier environment for us to be able to move barrels ultimately to the coast. And as we get closer to recontracting, which we have some contracts that will be expiring in 2025, it allows us to be able to recontract at better-than-expected rates than we had a couple of years ago. So a lot of it is beneficial for us and it needs to be that way because ultimately, we need to get volumes ultimately to the rest of the world.

Got it. That's very helpful. I wanted to pick up on the Oryx point as you talked about there. Just wondering how it's progressed versus expectations. And if you could touch on, I guess, the commercial synergies or anything else the Oryx deal that you see now that maybe you didn't see before?

Sure. So the joint venture as we've transitioned in, it takes a long time to be able to get everything fully integrated, but the immediate transition has gone very, very well. it's performing better than we expected, just a little bit over 10% better than we expected. It's what we reported in the first quarter. And when we think about what it ultimately brings to us, I talked about the aggregation benefits and the footprint as far as the gathering system. When we did the joint venture, we drew a box around the gathering system. So as we thought about the economics, we didn't take into account any other commercial synergies that might be out there. And clearly, what we hope is as contracts that Oryx had that may have gone to other long-haul systems. As we go forward and as those contracts expire, the benefits of the Plains system we would hope we'll be able to move some of those volumes into our system. Because as you all know, we have this integrated system and if you can get multiple touches through that and to be able to pull it from supply basins to end markets, that fits very well for us because we think we can offer a solution that's really across all 3 of those segments. So going forward, we would hope that we'd get some additional commercial benefits from that to be able to move volumes down to the coast, perhaps for people that want to have exports and exports is going to be a very big piece of the pie going forward.

Got it. This makes sense. That makes sense. We did have a question come in from the audience. although the screen kind of blanked out on me, so I don't see what it is. But just given valuation -- in the discounted valuation for Plains right now, how does management think about trying to improve valuation overall?

So I assume this is valuation of our equity. It's clearly something I think about every day. For us, the number one goal for us right now is, one, maximize cash flow. If we maximize cash flow, stay very disciplined on our expenses as well as our capital investments, that gives us the maximum amount of free cash flow to do something with. And we will stay disciplined. Back to the leverage in the Permian Basin, we've given you more disclosure on how we view the Permian Basin spare capacity. And roughly, our capacity is 2/3 of what our -- we're utilizing roughly 2/3 of what our capacity is, and that gives us the ability to have some operating leverage to be able to grow going forward. And we think having that ability to grow without spending a lot of CapEx is going to be good. Goal number one for us on the allocation side of the piece of the puzzle is getting our leverage targets to where we want to be. We're sitting about 4.4 at the end of -- 4.4x, and this would be on a rating agency equivalent to debt-to-EBITDA metric. At the end of last quarter, our goal is to get to 4.25 by the end of the year and hit our targets of 4.0 by mid-next year, and we've established a range of 3.75 to 4.25. And so we think that helps. And then quite frankly, the environment that I kind of laid out earlier, I think will help as well because there's been a very negative view on crude oil companies over the last couple of years to the point where I think there's been a lot of questions on do we even have a terminal value going forward. And again, in my opening comments, what's going on in the world, I think, is really going to show that we need all forms of energy, including crude oil. So I think a combination of executing against our plan, hitting our metrics on leverage. The ability to grow our EBITDA without spending a lot of CapEx and just basically executing on what we committed on. Our expectation is that it will help our equity.

Got it. And maybe picking up with that a little bit more. When you hit that 4.0 leverage mid next year, would that be an opportunity to kind of step up buybacks more at that point? Or how do you think about once you kind of hit your financial targets, what's the next steps at that point?

Well, our target is 4.0. We've got the range for a reason. When we get there, we've publicly stated our goal is to once we get to our debt leverage target, increase the allocation towards unitholders in the form of buybacks, opportunistic buybacks, discretionary buybacks, not programmatic as well as increased distributions. And at the same time, we're going to look hard at the -- our leverage numbers and based on the outlook of the business where it's at, it may go a little further down to the lower end of that range, but it will be nice to be able to make those decisions.

Got it. And maybe weaving into this conversation as a whole. Portfolio optimization is something Plains has done a lot more in recent years. Just wondering where we stand at this point as kind of a [ thick set ]? Or is there more opportunities?

Well, my background, I spent a lot -- I spent 20 years in refining. In the refining world back then, there was -- capital is not your friend, and optimization was really the modus operandi of how do you get more out of your assets. And frankly, the midstream sector went through an incredible growth phase where there wasn't -- you weren't rewarded for optimization, you were really rewarded for building additional capacity and significant growth staying ahead of the producer environment. And I would tell you that the last couple of years has really forced us to focus more on optimization, which is how -- why we've laid out, what is the capacity of what we have and we do have a lot more opportunities there. We've got the leverage in the Permian that I talked about. We've got Capline, which has got leverage -- a lot of leverage there. And then frankly, I'm very excited about our Canadian opportunities in the NGL side. We've got straddle plants and fractionation facilities up there, which allow us to take liquids, NGL liquids out of gas. And when you look at those complexes, there's a lot of opportunity to be able to optimize that. The ownership structure that we had in those entities may not have been conducive to allow us to optimize, but we've been working hard on trying to reset the commercial arrangements that we have or even in some cases, we did a swap with our Milk River crude pipeline with Empress capacity, which once we can get the opportunity to control some of the -- the Empress capacity, it allows us to optimize across the multiple trains that we have there. So there's still a lot of optimization that's in the portfolio. And when we think about that, it's even more than just the assets we have, right? If you think about the Oryx JV, I would consider that -- it was a joint venture, but it was also an incredible optimization opportunity between the 2 entities in our gathering system.

Got it. That's helpful. Canada was actually where I want to go now.

I'm sorry.

No, no, that's great. I mean you gave some good backdrop on what's been happening recently. But maybe just taking a step back, where -- where is the Canada or the NGL business been with Plains historically, and that strategy has changed over time and how you see that, I guess, moving forward?

Well, it's a great question. We -- we've always had the Canadian business, but frankly, you probably haven't heard a lot about it because we really haven't -- we haven't had to report it as a segment by itself, which is what we do now. We've got crude and we've got NGL. We view it as a separate segment as we operate it, and that's why we felt it was important to segregate it out. And I think by doing so, one, we can articulate what we're trying to do with it easier than we could before. And frankly, again, it's a great business. It's 20% of our EBITDA, $400 million to $450 million for this year on the outlook. And it's an integrated business. It's gathering. It's taking straddle plants to be able to extract NGLs at our Fort Sask and our Empress facility. And then we also have a facility on the East Coast in Sarnia, Canada. So you've got that whole value chain that you can pull the molecules out, and we've done a lot of optimization that people probably haven't recognized, but we've -- we've honed and optimized our distribution of all those NGLs and we're a lot leaner. We've got much less terminals than we had 5 years ago. And it's a value chain that we continue to try to hone and optimize as we go forward. And it's, I think, the opportunity in this environment with a higher oil price and a higher frac spread environment and the opportunities that we have to optimize is going to have some continued growth for us.

Got it. That's helpful. And pivoting to the emerging energy team recently set up there. I was wondering if you could give us some backdrop on what led to that? And what is the team doing right now? How much capital could be deployed now versus later? Or really just what projects, I guess, are in focus there.

Sure. So we move energy from point A to point B for different people. We've got contracts to do so. So early in the energy transition discussions, we got a lot of questions on, why don't you convert one of your lines to a renewable something? Right? And I actually had a joke, one time I said, well, gee whiz, we'll just move nothing, but naturally occurring organic materials through the line. And the first line I said with that would be really a good start. Of course, it was a joke. But the point of this is we've got existing contracts to move things. We've got infrastructure. And when you think about any energy evolution project that's out there -- and frankly, I've never seen more focus on this in my 40 years in the industry than today on opportunity sets there. There's a lot of money. There's a lot of opportunity. There's a lot of desire to try to crack the code on being able to have some breakthrough technologies in the area of alternative energy, carbon sequestration, hydrogen, we can talk more about that. But what do you need ultimately when you do that, you need infrastructure. So the infrastructure piece of this sometimes lags perhaps the R&D side or the development of technologies to either pull hydrogen out of molecules, to sequester carbon dioxide. We've got a study that we've kicked off in Canada on storing hydrogen in some of our sub -- our underground caverns that's ongoing right now that we've announced with. It's a subsidiary of the Canadian government called Atura Power. So we're going to focus on things that infrastructure can do. So as far as out there trying to devise new technologies or different things, that's not our core competency. Our core competency is moving things from point A to B and storing it. So that's what the hydrogen study in Sarnia is. It's take hydrogen, store it and we're very close to power plants there. Can you use the hydrogen during peak power periods to be able to fuel power production. We are looking -- we haven't made any announcements on it, but we're looking at peak shaving and optimization around our power usage in our facilities. When you have power and you use it, it's usually priced on peak loads because the grid has to have backup power for it. So if we can have batteries there that during peak periods, we can pull off the battery to get our -- to get our peak load lower, we save money as well as we take peak float off the grid, which ultimately helps and hopefully keeps higher emitting power sources from producing. So that's something that we've been studying very hard and may have something to announce here at some point in the future. So those are the kinds of things we're working on. We've got a group dedicated to this, and it's really around how do we use our competencies, the infrastructure and everything we want to do has to make sure it's got to have strong financial returns for us, and it's got a part lay on the talent that we've got and the assets we've got.

Got it. Got it. That's very helpful. And I want to come back to a point that you touched about -- touched on earlier, but I think it's somewhat underappreciated in the Plains story, I guess, just given the platform as it is the aggregation capabilities, the segregation capabilities, the full integration all the way down the value chain. What opportunities does that present for Plains? And maybe you could walk us through as far as different grades of crude and what you can do?

Well, in our business, it's always a better environment when there's a more supply needed and more volumes flowing. The less volumes that flow, the less opportunities that we have to be able to do things with it. When you think about our -- I'm going to focus on the Permian because that's the easiest one to talk about. We've got a lot of storage capabilities there. When crude is not needed, the differentials between crude oil tighten, and there's not an opportunity to be able to tailor make crudes for different folks. And so when you think about the environment that we're currently in, a lot more is flowing. There's a definite need in the world for different grades of crude. A lot of the new refineries that are built in the world are lighter crude, a lighter crude complexes that are integrated in with petrochemicals and what do they want? They want light-light crudes, right? In the U.S. refineries, like heavy crudes. It was expanded to be able to run lots and lots of heavy crudes, very complex crudes. And so for them, the light crude is not optimal. And so in this environment where the world needs more energy, there's more opportunity to be able to optimize, and that gives us a lot of opportunity to be able to help people segregate crudes, blend qualities, the differentials widen out. So there's a lot of positive that happens in an environment that we're in today.

Got it. That makes sense. And another question on the Permian. There's been a lot of conversation in the industry whether or not crude oil pipes might be repurposed into other service given current overcapacity. But what we've seen, there's a lot of difficulties in doing that. But just wanted to get your latest thoughts on if you see something like that happening?

Yes. So back in the -- 2 years ago, back when there was not much flow flowing through pipes back to the optimization strategy. We had a number of conversations with people about repurposing lines. It's hard because, especially if you got more than 2 people that are talking, you get to a third or fourth potential partner and doing it gets more complex. Where we sit today, the crude lines are going to be needed. We don't expect anything to be converted to a gas line because the volumes of gas that we're talking about are higher. And in that case, the optimization piece doesn't really fit. You really need to have either expansions or new builds, which have stepped up a number of our -- the midstream sector has stepped up. And there's roughly 4 Bcfd of gas takeaway that's in the works right now to be able to evacuate the Permian of gas. And roughly half of it is expansions and the other half is -- actually a little bit more than half is a new build. So I think those will help satisfy any constraints on gas. We could have some tightness or a little bit, but ultimately, I do think the gas is going to be able to take away and it will help facilitate crude from being able to get to global markets as well.

Got it. That's very helpful. I think we're running thinner on time, but just want to get one last question in with regards to Houston versus Corpus Christi as a destination of crude, if you could contrast the 2 markets there.

Well, we've had a lot of discussions on that, and sometimes people talk your book and where your terminals are. What I would tell you is we have pipes to both, right? And the markets do change. So we think access to both markets are very, very key. The pros of Houston are, there's a huge refining complex that needs barrels. The pros to -- the cons are, it's -- there's a lot more volume there, and there's more congestion. Corpus Christi, there's less refining capacity, but there's also less congestion. So if you think about a barrel that is destined to export markets, we think the better home is Corpus Christi. If it's a crude barrel that could be consumed by local refineries, Houston may be the better optionality to be able to take a barrel there. Corpus Christi is the largest export point in the Gulf Coast. It's about 1.7 million, 1.8 million barrels a day of export capacity that are actually exports there and it's just over half of the total Gulf Coast export capabilities. So it clearly is shaping up to be more of an export market. And if you look at the pricing on local prices, the Corpus market is actually $0.60 to $0.80 better than the Houston market. So those change over time, but today, it's actually rewarding a barrel to go to Corpus more than it is to Houston. So we've got access to both but we probably have more long-haul capacity to Corpus than we do to the Houston one.

Got it. That's very helpful. I think we're down to our last minute. I don't know if there's any kind of final thoughts that you want to leave the audience or areas that we didn't touch on that you want to address?

Well, maybe I'll finish where I started. Our business is we move molecules from point A to point B. And the play I have is we all need to get out and extol the benefits of what we do. We need to be proud. I tell our employees, we have noble jobs. And I think as we get to midterms and opportunities to engage with the administration, it's an all of the above solution that really is going to solve the world's problems. And Plains is a good investment.

Well, thank you, everyone, for joining us. Thank you so much, Willie, for joining, and everyone, have a great day.

Thanks, Jeremy. Thank you all.