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

Good day, and thank you for standing by. Welcome to the PAA and PAGP Second Quarter 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Blake Fernandez, Vice President of Investor Relations. Please go ahead.

Thank you, Danny. Good morning. Welcome to Plains All American Second 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 consolidated 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; Al Swanson, Executive Vice President and CFO; and other members of the 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 second quarter adjusted EBITDA attributable to Plains of $738 million, which puts us on track to deliver our full year EBITDA guidance of $2.88 billion, plus or minus $75 million for 2026. Al will cover more details on our results in his portion of the call. The conflict in the Middle East and supply disruptions from the Strait of Hormuz illustrate the importance of reliable, secure and responsibly produced energy. We believe this increases the value of existing infrastructure, and we are well positioned to help play a critical role in meeting global energy demand well into the future. While the macro environment has been volatile, we are successfully executing on our 3 key initiatives for the year. In May, we closed on the sale of our Canadian NGL business, bringing our leverage down to 3.3x. Additionally, we have captured our targeted Cactus III synergies, which will enhance our connectivity to the Corpus Christi market and oil exports longer term. Finally, we expect to realize $50 million of efficiencies across the organization by year-end 2026, along with an additional $50 million by the end of 2027. Strong producer activity and customer demand, coupled with our premier crude oil footprint are creating new organic investment opportunities. As we outlined in our June press release and detailed on Slide 5, we increased our growth capital spending for 2026 from $350 million to a range of $400 million to $450 million. These are predominantly quick hit projects that will contribute to the 2027 EBITDA and will generate a rate of return above our hurdle rate. This includes a further build-out of our Permian gathering system to service additional dedicated acreage in the Midland and Delaware Basins. The acreage is backed by several high-quality producers and spans multiple counties. This brings our POPB JV total dedicated Permian acreage to approximately 5.1 million acres. Additionally, we're expanding our Canadian gathering systems. The additional capacity and connectivity will support strategic projects in the Clearwater and the Duvernay formations and are backed by producer commitments. Finally, we have sanctioned a very capital-efficient expansion of the Cactus III pipeline, adding an additional 75,000 barrels a day capacity. This brings the total capacity of the line to 725,000 barrels a day. The expansion will come online by the end of this month and will support increased demand for export barrels out of the Corpus Christi market. We continue to evaluate additional investment opportunities, both organic and inorganic that strengthen our portfolio and complement our existing asset base. With regard to Permian production, we now expect approximately 100,000 to 200,000 barrels a day of growth in 2026 versus 2025 on an exit-to-exit basis. Upside from our previous forecast of relatively flat production is mainly due to natural gas egress coming online earlier than expected. Importantly, the ramp-up in Permian oil production will create meaningful momentum into 2027 while having minimal impact to EBITDA this year. Our capital allocation framework and efficient growth strategy remain intact. We have a commitment to capital discipline to optimize our asset base and maintaining a very flexible balance sheet while returning significant cash to shareholders. With that, let me turn the call over to Al to cover our quarterly performance and other financial matters.

Thanks, Willie. Slides 6 and 7 contain adjusted EBITDA walks that provide additional details on our performance. For the second quarter, we reported crude oil segment adjusted EBITDA of $690 million, representing a significant increase from the first quarter level. This was driven by a combination of Cactus III synergies, efficiencies, market-based opportunities and the absence of headwinds from the first quarter. I would note that second quarter results include approximately $14 million of one-off environmental remediation expenses. Moving to the NGL segment. We reported adjusted EBITDA of $40 million, which reflects the mid-May closing date on the sale of the business. We are contemplating removing NGL segment EBITDA from our reporting in the third quarter and instead reporting adjusted EBITDA with one segment. A summary of 2026 guidance and key assumptions are on Slide 8. As Willie outlined, we raised growth capital to a range of $400 million to $450 million and increased our Permian production forecast to 100,000 to 200,000 barrels a day exit to exit. Maintenance capital was decreased to $175 million, largely due to the timing of the NGL sale. Regarding our pipeline loss allowance revenue, we are approximately 70% hedged for the balance of the year at an average WTI price around $62. We plan to disclose our 2027 hedge position in February in conjunction with our full year outlook. As illustrated on Slide 9, we expect to generate approximately $1.75 billion of free cash flow in 2026 and return significant capital to unitholders while maintaining financial flexibility. Our pro forma leverage ratio at the end of the second quarter was 3.3x, reflecting approximately $2.9 billion of debt reduction driven by the NGL divestiture. With that, I will turn the call back to Willie.

Thanks, Al. Slide 10 highlights the 7% compounded annual growth of our crude over the past few years. Our efficient growth strategy and the sale of the NGL business position us well to execute through a range of market environments, generating a more durable cash flow and creating long-term value. We continue to build momentum into 2027 with increasing Permian production and a strong balance sheet with leverage at the low end of our target range. Our capital allocation framework priorities remain the same: one, return cash to unitholders through our targeted $0.15 per unit annual increases; two, execute on accretive bolt-on acquisitions and organic CapEx; and three, maintain a strong balance sheet with financial flexibility. We have already identified and expect to capture an additional $50 million of streamlining costs in 2027, and we are well positioned to capture potential tailwinds from the volatile oil macro environment. With that, I'll turn the call over to Blake to lead us into Q&A.

Thanks, Willie. [Operator Instructions] With that, operator, please open the call for questions.

[Operator Instructions] Our first question comes from Gabriel Moreen with Mizuho.

Just wanted to ask about the revised CapEx, which I know came out a couple of weeks ago. Can you just talk about this level of $400 million plus in investment capital? Maybe how sustainable you think that will be given that some of it's Canadian, some of it's Permian, some of it's Cactus. Just curious how you're thinking about in '27 and beyond?

Sure. Gabe, it's Christopher Chandler. So Willie laid out in our slides also show the drivers that led us to change the guidance for 2026. Some of those are typical 18- to 24-month projects. So the spend will carry into '27 and maybe a little into '28. The way I think about it is I don't expect 2027 to look significantly different than 2026, but it is trending a little higher than our historical $300 million to $400 million range net to Plains. So we'll provide 2027 guidance, obviously, when we provide full year guidance in late January, early February.

And then maybe if I could just ask about the Cactus expansion and adding the 75,000 barrels a day. Just how long do you think that takes to fill? And to what extent can you keep adding these bite-sized expansions to Cactus going forward before you have to contemplate something much bigger than that?

Gabe, it's Jeremy Goebel. To answer your question, our marketing affiliate can fill the space now and capture the volatility that we're seeing. The expectation is to contract that over time when we see the market. So the reason we executed on it earlier than expected is you saw a lot of volatility, you saw growing production. You saw a really short time period, very capital efficient. And you see on the demand side, new buyers on the market. So our marketing affiliate can fill that role until someone wants to take the space from us. So we can fill it quickly and then turn it to a term basis, which is our ultimate goal. And then to your question on are there other opportunities. Our team continues to evaluate capital-efficient opportunities, and we'll update you as we have them.

Our next question comes from Manav Gupta with UBS.

I wanted to go -- I know it's a little early, but I was thinking maybe you could talk a little bit about how 2027 is shaping up for you, the puts and takes, especially given the number of new pipelines expected, which will alleviate the Permian egress problem. So that crude could come to the market. So help us understand the puts and takes for 2027 versus 2026.

Manav, it's Willie. Let me try to address this. We're not going to give you guidance on '27 because the world continues to evolve. What we really want to convey to you is that longer term, whether it's the end of '26, early '27 is really going to be determined by how things shape up in the Middle East. There remains a lot of uncertainty, as everyone knows. The oil markets are very extreme. But as we view this, as the longer this goes, the more you draw global inventories to low levels, the more important North America is going to be to providing fuel for the rest of the energy to the rest of the world. So everything we're doing is positioning us to be able to capture that when it comes. And you tell me the oil price, you tell me when things resolve, we can easily put a number together, but that's probably the extent I'll share on what our views are other than it being very constructive. And we've got a lot of momentum going into '27.

Perfect. My quick follow-up that I just wanted to understand from you is that your balance sheet is fixed. I think earlier in the year last year, you were looking at more bolt-on opportunities. Now I think you have looking at more organic growth projects also. Can you help us understand the balance between future growth driven by bolt-ons versus organic opportunities?

Manav, this is Willie again. The answer is we look at all of them. We've got lots of levers to pull. If the organic opportunities present themselves, we do it. If it's the bolt-ons, we execute on those. I'm really pleased where we are with our balance sheet where it is and the ability to pull levers. There are lots of different things, whether it's bolt-ons, whether it's CapEx, returning more cash to shareholders and even taking out the pref. Those are some of the options that we have. So it's a good position to be in, and we'll play the right card when the time comes.

Our next question comes from Praneeth Satish with Wells Fargo.

So just going back to the guidance, you raised the exit-to-exit Permian production growth by 100,000 to 200,000 barrels per day on improving gas egress. But I guess your -- and you kind of had strong Q2 results, but you left the 2026 EBITDA guidance unchanged. I guess intuitively, I would have expected at least some of those flush volumes to reach your system and contribute to earnings upside this year. So maybe you can just help us understand why the higher volume outlook doesn't necessarily translate into higher EBITDA guidance for this year and how you're thinking about the timing of when you realize those benefits?

Yes. This is Al. One quarter -- first quarter crude was kind of the low point for us. 2Q, we reported the $690 million I mentioned, which is up over $100 million from the first quarter. Our guide at the midpoint currently for the second half is above the $690 million. The math would say it'd be in the low $700s. So we've modeled in a very strong kind of exit to the year. We do believe that we will be seeing and capturing volumes. We had a bit of that in already, but we do expect really that this sets us up for the momentum that Willie mentioned for 2027 more so than "a raise" for the second half of the year since we've already modeled a pretty strong second half of the year.

Got you. That's helpful. And then maybe switching gears on the Cactus III expansion. So you guys have one of the last meaningful brownfield expansion opportunities in the Permian with Cactus. So I guess I'm just trying to understand how you balance adding incremental capacity versus just kind of maintaining a tighter market where you could benefit from stronger recontracting rates as it's been a tough slog the last few years. So I mean, I'm sure you've done some internal analysis on that trade-off. But I guess, with you going forward with this expansion, can we assume that the expected returns are compelling enough, I guess, to outweigh the benefits of a tighter market? Just how should we think about that?

Praneeth, good question. This is Jeremy. First of all, the 75,000 barrels a day won't change the market. And our outlook for production is substantially higher than 75,000 barrels a day. So the market from a supply and demand takeaway will be net tighter. The economic returns is very capital efficient that's not in question. They'll be very good. From our standpoint, we're executing on it. Basin is very well contracted. Cactus I is very well contracted. Cactus II is very well contracted, and we're working to continue on Cactus III. So we don't think this impacts our ability to contract at strong rates across the system. And we think the volatility will present some opportunities to pay for the expansion in a short period of time and give us the opportunity to contract more space.

Our next question comes from Jeremy Tonet with JPMorgan Securities.

This is Francina on for Jeremy. Just wanted to dig a bit deeper on the guide that appears to kind of present declines outside of regions other than the Permian. Can you walk us through what you're seeing with volume expectations and kind of where that leads us in terms of puts and takes to the current maintained guide?

Sure. This is Jeremy. Look, we're seeing increased activity, the Permian has added 30 rigs from the trough. The Eagle Ford has added 10 rigs. The Powder River Basin is up 33%, so from 9 to 12 rigs. Canada continues to grow. So we're seeing opportunities across the system as evidenced by the expansion capital across the system. So from our standpoint, we're cautiously optimistic that, that will continue, and it should be good for both our assets in the Permian and outside the Permian. As for the guide, I think Al covered that. We are certainly in position to continue to execute as volatility. The most volatile piece was the second quarter. The third quarter price volatility was slower. Volatility in margins across the regions got pretty narrow. It's just a different quarter. And so that the same situation because ships are moving all over the place could represent itself in the third and fourth quarter. So we certainly expect to continue to do as well as we can. But right now, we're maintaining guidance flat, but we think we're going to execute on what we've already put in the plan and hope to beat it.

That's helpful. And then I wanted to also touch on what you're seeing for the Canadian organic growth opportunity set and whether those opportunities more so present near term or longer term, if you could talk about that.

Sure. We're very excited about Canada. The Clearwater around our Rainbow asset, we are continuing to add capacity. And every time we add it, it gets full. So we're excited about it, and those are long-term contracts. Same with our Rangeland asset, which sits in the Duvernay, and we can bring those either north to Edmonton or south to the U.S. markets. So both of those areas are seeing capital. Our Manitou asset, which we haven't talked about much, is seeing activity -- substantial activity. There may be an opportunity to partner with some of the egress that's coming out of Canada. So I think we see a lot of opportunities in and around our gathering footprint and how that might fit with assets like our Cushing terminal or our Capline assets downstream. So I think we're excited about Canada and knock-on effects for the rest of our business.

Our next question comes from Spiro Dounis with Citi.

I want to start off first with market-based opportunities. Can you maybe talk through the outlook into the second half of '26 and maybe where you still expect to see some areas for opportunities? And kind of just curious how you're thinking about differentials, volatility, curve structure, storage and how much of that is contemplated in the guide here?

This is Jeremy. We're not forecasting market-based opportunities other than what we've captured. So I think from our standpoint, if those opportunities present themselves, we will. We can play time, quality and location spreads across the system, and we will. And so from our standpoint, we feel very well positioned with where the guide is. And as volatility presents itself, we'll capture it just as we did in the second quarter.

Got it. Second question, maybe just focusing on exports. if you're seeing changes in customer behavior. Jeremy, I know you mentioned seeing new customers show up. Curious if that applies to exports here. And how are you thinking about flows to Corpus versus Houston into the back half of '26?

So yes, we are seeing different customers be interested instead of being spot purchasers or under term contracts only from the Middle East to look to expand where they purchase barrels for some level of security of supply. So that is a different behavior than we've seen. I think you've seen it across commodities as well. So we're going to continue to look at that as ability to term up additional space. Corpus versus Houston, look, both are very good markets. The Corpus market does demand a premium. It's a single quality barrel that's WTI largely [ some TL. ] Houston has got a broader mix of what gets exported. It's got more refining capacity. They're both very good markets. Both markets are largely tight. You've got close to 90% utilization in both markets. So we're cautiously optimistic that both will continue to grow as the markets tighten and get to back where you're closer to the longer-term margins where we'll contract additional space.

Spiro, this is Willie. You know our assets well, but I think the thing I wanted to highlight is on our visits with people, we've been talking about the market shifting to a demand pull model. We've been in a supply push model for quite some time with surplus supply in the world. I do think what you're -- the question that you're asking is really hitting on a key thing, which we believe is happening. With the inventorying of the global inventory of the crude supplies, this is really shifting to a demand pull market. And your question about others wanting to come and get access to barrels really as a security of supply is very true. And if you look back in the second quarter, we actually had record crude exports out of the Gulf Coast. And as these things typically work because you've got a long supply chain with ships, that shifted. And now we had more volumes going up to Cushing, but that could easily start shifting back as global events happen. So the key thing for us is we've got great assets that can play all these different options. Hard to exactly figure out what will happen, but when it will happen, we feel we'll be in the right place in time to be able to capture it.

Our next question comes from Keith Stanley with Wolfe Research.

Only one question for me. I wanted to dig into the Cactus III economics a little more. So your Permian CapEx this year is only up $35 million. You have the $40 million earn-out. So it kind of implies the Cactus III project is, call it, $50 million to $75 million, which would be a really high return for you guys. So looking forward, how can we think about the cost of future phases of expansion of Cactus III? Do they get a lot more expensive than this? Or can you replicate this a few more times?

Keith, it's Chris Chandler. I'll take that. First, let's talk about the phase we just completed 75,000 barrels a day. Without sharing the exact number, I think you're reading into our numbers well in that -- the expansion we just completed was highly economic. We were able to do it for far less than we anticipated when we acquired the asset, able to do it more quickly. I would think of it in terms of tens of millions of dollars, and that doesn't include the earn-out that we disclosed in the slide. So very, very economic and very quick to market, as Jeremy shared. We're taking a close look at future expansion opportunities. Those will have to be backed by customer commitments, of course. But I think it's safe to say that the costs for those future phases are looking more economic than we originally premised as well when we acquired the asset. So we're really pleased overall, we've been able to capture the synergies with Cactus III and expansion opportunities are ready to go and look very economic when the customer support is firmed up.