Plains All American Pipeline, L.P. ($PAGP)

Good day, and welcome to the PAA and PAGP First Quarter 2026 Earnings Call. [Operator Instructions] Please note this call is being recorded. I would now like to turn the call over to Blake Fernandez, Vice President of Investor Relations. Please go ahead.

Thank you, Michelle. Good morning, and welcome to Plains All American First 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, CEO and President; and Al Swanson, Executive Vice President and CFO, along with other members of our management team. With that, I'll turn the call over to Willie.

Thank you, Blake. Good morning, everyone, and thank you for joining us. This morning, we reported first quarter adjusted EBITDA table to Plains of $730 million. Al will cover the details on our results in his portion of the call. Let me start with the macro environment, which has changed significantly since our last call. Recent geopolitical events have reiterated the importance of reliable, secure and responsibly produced energy. The closure of the Strait of Hormuz has significantly disrupted global shipping channels and Middle East supply, contributing to stronger commodity prices over the past couple of months. In response, excess floating storage has been drawn down and strategic petroleum reserves are being released globally. While this helps balance the market deficit on a short-term basis, we are seeing a more constructive oil market developing on a longer-term basis. We expect this destocking environment to continue over the next number of months and ultimately drive a restocking phenomenon longer term, longer term as countries replenish depleted strategic petroleum reserves globally. Post war, we would not be surprised to see several countries restock their SPRs above pre-war levels, essentially creating an additional layer of demand into the future, which should support prices and incent producer activity. On the supply side, OPEC production capacity post war remains uncertain, but we suspect spare capacity will be tighter based on a slower recovery of shut-in production and infrastructure damage during the war. We believe the conflict shifts the focus towards more geopolitically stable regions to ensure security of supply. Against this backdrop, North America, including the Permian, remain well positioned to play a critical role in meeting global demand. As this occurs, the value of existing infrastructure in the ground should continue to increase over time. For these reasons, we believe Plains is well positioned for both the near-term volatility and longer-term macro environment. Based on these market dynamics and the growth trajectory that we see for our business, we have increased our initial 2026 EBITDA guidance. As highlighted on Slide 4, we're increasing the midpoint of our full year 2026 adjusted EBITDA guidance by $130 million to $2.88 billion. The NGL segment EBITDA is now expected to be $170 million this year, following first quarter outperformance of $45 million and the updated divestiture timing now in May 2026. Our trajectory of growth this year is underpinned by 3 key drivers: the sale of our NGL assets, Cactus III synergy capture and streamlining. The growth of our EBITDA is paced with the execution of these initiatives and is enhanced by capturing optimization opportunities that have been substantially secured over the next 3 quarters. We're also seeing increased producer interest in both Canada and the U.S. for additional connections to our system. The combination of all these factors will ramp up through the year and position us well into the future. Our premier crude oil footprint continues to support stable fee-based cash flows in a variety of macro backdrops. As global markets turn to North America for long-term energy supply, we are well positioned across key producing basins and downstream markets to drive multiyear growth. We remain committed to our efficient growth strategy, generating significant free cash flow, optimizing our assets, maintaining a flexible balance sheet and continuing to return cash to unitholders via our disciplined capital allocation framework. With that, I'll turn the call over to Al to cover our quarterly performance and other financial matters.

Thanks, Willie. Slides 5 and 6 contain adjusted EBITDA walks that provide additional details on our performance. For the first quarter, we reported crude oil segment adjusted EBITDA of $582 million, which was broadly in line with our internal estimate and includes a full quarter contribution from the Cactus III acquisition, offset by a number of one-off items, including winter weather impacts in the Permian, system maintenance and timing of minimum volume commitments. Moving to the NGL segment. We reported adjusted EBITDA of $145 million, reflecting a stronger-than-expected contribution from higher straddle production and improving frac spreads in March. A summary of 2026 guidance and key assumptions are on Slide 7. Growth capital remains $350 million, while maintenance capital was increased to $185 million, reflecting ownership of the NGL assets in May. Regarding the $130 million increase in EBITDA guidance, key drivers are outlined in the waterfall on Slide 8. The NGL segment increased by $70 million, driven by outperformance in the first quarter, along with the ownership of NGL assets in May. The oil segment was increased by $60 million, driven by captured optimization opportunities, FERC tariff escalators, increased spot tariff volumes and increased West Coast volumes. To the extent that elevated commodity environment persists in the second half of the year, we would expect to capture incremental opportunities. For 2026 guidance, we continue to assume Permian crude oil production to be relatively flat year-over-year. While we have yet to see a meaningful shift in U.S. producer behavior, any increase in activity would likely benefit 2027 and beyond. We expect an improving back end of the crude oil curve and removal of natural gas takeaway constraints as new egress projects start up later this year to drive incremental activity throughout the year. As illustrated on Slide 9, we remain committed to generating significant free cash flow and returning capital to unitholders while maintaining financial flexibility. For 2026, we expect to generate approximately $1.85 billion of adjusted free cash flow, excluding changes in assets and liabilities and excluding sales proceeds from the NGL divestiture. Our pro forma leverage at the end of the first quarter was 4.1x, reflecting the Cactus III acquisition. First quarter leverage pro forma for the NGL sale would decrease to approximately 3.5x, and we would expect leverage to migrate towards the low end of our target range of 3.25x to 3.75x by the end of the year. We expect net proceeds from the NGL sale to be approximately $3.3 billion, which is approximately $100 million higher than our prior estimate. Our acquisition of Cactus III last year has mitigated the tax liability to unitholders resulting from the NGL divestiture. As a result, we no longer expect to pay a special distribution following the closing of the NGL sale. Before handing it back to Willie, I would note that both current and deferred taxes are elevated on the statement of operations this quarter because of the restructuring activities associated with the NGL sale. There was no cash tax impact in the quarter as payment of the related taxes will be made in conjunction with closing or in future periods. With that, I will turn the call back to Willie.

Thanks, Al. In the midst of volatile energy markets, we remain steadfast and focused on executing our 3 initiatives for 2026, closing the NGL sale, driving synergies on Cactus III and advancing our streamlining initiatives. Our efficient growth strategy has positioned us well to execute through a range of market environments, generating durable cash flow and creating long-term value. Importantly, the improving oil macro environment starting to present additional organic investment opportunities with strong returns. We continue to evaluate both organic and inorganic opportunities in a disciplined manner. Capital investments help underpin long-term EBITDA growth, but they must meet our return thresholds and provide visibility into future return of capital to unitholders. Our transition to a pure-play crude midstream company, coupled with the acquisition of Cactus III is proving timely as tensions in the Middle East position North America as a key source of global energy supply into the future. Before I turn the call over to Blake, I'd like to make a brief comment about our pending transaction with Keyera. In terms of timing, as reported by both Keyera and Plains in separate releases earlier this week, we're targeting to close the transaction this month. While it's unfortunate that the Competition Bureau has chosen to challenge the transaction, their lawsuit does not prevent the parties from closing the transaction, which both Plains and Keyera are committing to do so. So I realize you have -- you may have some additional questions, but I hope you understand it would be inappropriate for us to comment any further on this matter. So we would appreciate if you would refrain from asking questions regarding the transaction. Blake, I'm now going to turn it over to you to lead us through Q&A.

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

[Operator Instructions] Our first question comes from Brandon Bingham with Scotiabank.

Just wanted to maybe ask on the new guide. If I look at your sensitivity and the new crude price expectations, it would imply that at least on price movements alone, the crude contribution should probably be higher than what is currently shown. Could you just walk us through what's baked into the new guide and maybe the embedded outlook in there?

Sure. Brandon, this is Al. Yes, our original guidance for the year assumed a $60 and $65 environment for 2026 to kind of a $62. We came into the year highly hedged at roughly those levels. The $85 environment that we're talking about for the future is roughly the strip from June through December when we looked at it. So there would be some benefit based on crude prices on our PLA, but the fact that we had hedged quite a bit before entering the year, that sensitivity we give is just a raw sensitivity. In order to make it more meaningful, we would have had to have disclosed to you the hedge position at the beginning of the year, which we haven't historically done. So what I would say is that the first quarter performance and the 9 months of our guide is very minimally impacted by actual PLA pricing.

Okay. Yes, very helpful. And then maybe just wanted to ask about in light of some of the commentary in your prepared remarks about a more constructive longer-term market and just the whole macro environment as it stands today, how are you guys thinking about the potential for the Epic expansion at this point?

Brandon, this is Jeremy. We're excited about the opportunities around our entire long-haul portfolio and are having constructive dialogue with existing customers and new customers looking for secure supply from the United States. So that results in some spot activity. But longer term, the expectation is to contract at higher rates than maybe before this would happen with potentially new counterparties. So that would apply to recontracting existing pipeline capacity and expansions as well. So we're looking at all the above and hope to have updates in the coming quarters on how that looks.

Our next question comes from Gabriel Moreen with Mizuho.

Maybe I'll just ask the Permian macro question, really, in terms of sort of your best outlook. I think previous years, you had talked about 200,000 barrels a day year-over-year growth. Best venture at this point, I realize there's a lot of things in play and things are changing quickly. But do you think that goes significantly higher from here, $400,000, $500,000 in '27? I'm just curious what your latest thoughts are there.

Yes, Gabe, this is Willie. Jeremy may have some additional comments, but I'll give you my thoughts. The U.S. producers have remained very disciplined as far as capital allocation, and they're looking really at the back end of the curve to see where it goes. WTI is roughly $70. And our view is when you start getting into the $75 and above, increased activity happens. There's also some other things that on the short-term operating bias that's limiting production or constraining it a bit. We've got some natural gas. The Permian has some natural gas takeaway constraints. There are new lines that are being built and being commissioned as early as later this year. So the thought being that alleviates itself. Our assumption for the Permian this year was flat. And if it -- if there is some upside, obviously, we benefit from it. But our view going forward is not giving a formal guide, but we would expect growth going forward and probably some momentum of volumes behind that's going to increase production here maybe with a little bit of a flush later this year or early next year. So I think it really depends on the back of the curve, but the systems are ready to go.

And then maybe if I can ask kind of on the sustainability of some of the marketing opportunities you're currently seeing. Can you just talk about, I guess, some of the spreads that you're seeing and also on the value of dock space the extent you're debating internally maybe terming some of those out at higher prices? And then also the steepness of the curve in backwardation, how that's playing with your storage? Is that helpful? Is that a hindrance? I'm just curious your thoughts on that.

Gabe, without getting into specific strategies, which I would say time location, quality spreads, all that volatility, we benefit from all of those because we have the assets, the supply position and the trading function to capture those opportunities. While it's hard to forecast those when they arrive, and that could be the time spreads, could you sell a barrel now and buy it back later by emptying a tank, that type of thing. Could you -- difference in grades between Canada and the United States, difference in grades on Gulf Coast grades, all of those are strategies and things we can take advantage of with our integrated system. And so we're excited about those opportunities. What we've put in this as Willie and Al both stated, we've substantially captured what's in this forecast. It's hard -- this is a very volatile time period. We've only been in the 60 to 70 days. So it's hard to forecast that to continue. But if it continues, we would expect to capture more opportunities going forward. And just to add on to what Willie is saying, we do estimate there's close to 200,000 to 300,000 barrels a day of oil that's behind pipe in the Permian Basin. So that flush production he's talking about is substantial. And a lot of that's in the more constrained areas of the Delaware Basin, which we have a broader footprint. So take New Mexico and other places. So as Willie said, we're not giving a formal guide, but that -- if you look at the plot of -- you talked about spreads, the Waha Spread, it's almost flat price in Waha has been largely negative since last September. That's what's accumulating all of this to go. And so as gas prices recover, productive capacity is already there to add. And as you add more, that puts more pressure on potentially long-haul spreads and the ability to term up contract at greater rates. So we're seeing more demand from new customers. We're seeing potentially less production. Those should all benefit to taking short-term opportunities and convert them to longer-term opportunities.

And Gabe, this is Willie again. If you look at our numbers, long haul has increased and the margins on that has also improved. So I think we're moving to a more structurally full life situation as we go forward, which should be constructive for us.

Our next question comes from Manav Gupta with UBS.

I just wanted to focus a little bit on the weather impact. I think it was about $49 million quarter-over-quarter. I'm just trying to understand the fair timing of minimum volume commitments. Is there a possibility some of this can be reversed in 2Q? Some of what you lost in your -- in the current quarter comes back into the second quarter. If you could talk a little bit about that.

Yes, Manav, those are 2 different things. But first, with regard to weather, weather is just production shut in for a period, you can't make that back, but the flush production does come back. With regard to the timing of MVCs, that's continuous in our process. And if you look at some of the earnings calls from others about their dock performance or other things in that first quarter, freight was really expensive and margins didn't have people moving. So long-haul volumes were down across the industry, but that has completely reversed in timing. So you would absolutely expect that to be recovered. It's just a question of when those MVCs accrue versus when they're paid, but all the pipelines are full again and the MVCs are being reversed.

Manav, this is Willie. If you're referring to Slide 5, I think the point of your question is on that negative 49, there's a bunch of onetime events in there that you're absolutely correct that we -- that will not occur again as we go forward.

Perfect. And if you could also talk about the very strong results from the NGL segment in the first quarter versus the last quarter, some of the drivers of what helped you deliver a much stronger earnings on that segment quarter-over-quarter.

Sure, Manav. This is Jeremy again. higher border flows than expected. You had very full storage in Canada and continued production, which required the volumes to be exported, and those were exported through our Empress assets. So higher border flows leads to more straddle production, and that would all be unhedged and impact -- so that was more border flow concept, but higher frac spreads as well in the first quarter towards the end of the first quarter. So I'd say those 2, and that has continued into the second quarter, which is the increase in guide for the NGL business through closing.

Our next question comes from Michael Blum with Wells Fargo.

My question is really on the guidance, the crude oil segment. So I'll just ask it all at once. So the increase, I just wanted to make sure I understood, it sounds like most of this is optimization, which you've already locked in and then maybe the rest is PLA. So I just want to make sure I understood that. And then the second part is, if prices stay elevated for the balance of the year, would there be upside to the guide in the crude segment? Or is that already sort of baked into the numbers?

Michael, this is Willie. Great question. Our assumptions are -- the numbers that are in there really are what we've captured that roll off through the year that we'll actualize on optimization efforts. And you're correct. If we have a stronger macro environment, higher prices, there definitely is upside.

Our next question comes from Jeremy Tonet with JPMorgan Securities.

Just wanted to see what you guys are seeing locally ear to the ground there as far as producer activity and whether rigs being picked up by the independents or how -- if larger drillers could as well? And what would be needed to be seen, I guess, across the strip to gain the comfort to do that. And so just wondering how you think production could uptick here? Or what do you see?

Jeremy, this is Jeremy. So since it started, you've already seen 15 rigs added back, and we would expect some to continue. But as Willie mentioned, there's a bit of a throttle right now. You can't add more natural gas to the system. as the flaring not allow. So productive capacity is there, rigs being added now would impact 2027. I think there's a bit of confusion by the market in that if you take the products market and the physical crude market, they're substantially more tighter than the financial markets would indicate, which means the back end of the curve has to come up. It's very difficult even if you open the Strait of Hormuz tomorrow to get everything back in order the way it was. It's going to take a while for shipping to start. You have to empty tanks before you can start back up production. Products markets are just empty in some places. So I think there's real dislocation that will take time. I think some of the integrators have stated it's for every day, it's down, it's 3 days to get back up. And so it's potential for months to get out of this, even if they were resolved today. I think that's the part that probably producers are waiting on is more surety at the back end of the curve that they bring rigs on because at this point, the service companies are stacked equipment. It takes capital to get those back in, takes commitments to make those back in. So I think producers to make those commitments need commitment from prices that they'll be there. And the longer this goes, the more likely that will occur. But I think it's just a dislocation in the back end of the curve right now that's maybe causing some hesitancy, but that's going to prolong the problem.

Got it. That's helpful there. And then I just want to see, I guess, how you think that impacts basis over time here and what it could mean for future egress expansion?

Thanks, Jeremy. It's constructive for basis, more production is and more demand on the water. So you're seeing a specific to the Corpus market and some of the on-the-water efficient docks, you're seeing higher pricing and relative to even the screens. And so that on a prolonged basis as there's new buyers coming to America, there's vessels that used to be pointed at other locations that intend to come back and forth to the United States for a while. So I think you're seeing that on the NGL side. I think you'll see it on the LNG side, and I think you'll see it on the crude side. More buyers and more demand is generally constructive for spreads. And so we would expect to match either our supplier or our customers with that and hopefully offer service at a higher rate.

Jeremy, this is Willie. You're aware that on Cactus III, we have expansion capacity there. And as we've always said, we're going to pace that with market demand and commercial contracts. The other highlight on that is, as we've gotten to know the project and have assessed it, we have the ability to do that in a phased approach. And also, it's really fairly flexible for us to get additional volumes, and it's not a long term -- it's not a binary big expansion. There's ways to do it in phases, which should match customer demand. And generally speaking, in a higher price environment, there are more opportunities because there's basically a pull on the whole system. And so typically, in that kind of a market, the market opportunities and optimization opportunities become a little more prevalent versus a lower price where less is moving and there's less opportunities. I hope that helps.

Our next question comes from Jackie Koletas with Goldman Sachs.

First, I was wondering if you could just comment on the progress of your cost reduction initiatives. Are these on track with expectations at this point? And is there any potential for upside capture here? When should we expect for Plains to realize more significant efficiencies through the year?

Jackie, it's Chris Chandler. I'm happy to take that. We are on track to capture the efficiencies, $50 million by the end of 2026 and an additional $50 million in 2027. We've actually already made a number of changes, some unrelated to the NGL transaction, some in anticipation of the NGL transaction. So we feel confident in the number. There's always upside. We're always looking for additional opportunities, and we will certainly pursue any that we find. We're not prepared at this time to change the $100 million target we have through the end of 2027. But on track there, and things are going well.

Great to hear. And then I'll just one on just shifting to capital allocation. With debt reduction as a near-term focus, particularly following the pending NGL sale, when can we expect a shift or kind of allow a shift from debt paydown to a larger focus on potential buybacks or preferred paydowns?

This is Al. I'll take a shot at it. Yes. So clearly, with the proceeds from NGL, we anticipate taking that and paying down roughly a little over $3 billion of debt, which would be the term loan, the outstanding CP we have and a $750 million note that matures later this year. Post that, we expect to be right at the midpoint of our leverage. We expect of 3.5x. We expect that to migrate down, which will then come back to where we've been for the last number of years prior to the Epic acquisition, leverage towards the low end of our range. Our view would be capital allocation, first and foremost, focused on maintaining distribution growth, funding investments, whether they're organic or M&A related. As well as looking at taking out prefs should leverage remain at or below the bottom end of the range and opportunistic share repurchases. So a long-winded way of saying that once we get through the NGL sale and deployment of the proceeds back to where we've been operating for the last several years.

I'm showing no further questions at this time. I'd like to turn the call back over to Willie Chiang, President, CEO and Chairman, for closing remarks.

Michelle, thanks. We appreciate everyone's support and attention, and we look forward to seeing you on the road. Stay safe. Thank you very much.

Thank you for your participation. You may now disconnect. Everyone, have a great day.