Plains Gp Holdings LP Q2 FY2025 Earnings Call

Thank you, Latif. Good morning, and welcome to Plains All American's Second Quarter 2025 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, and the consolidated balance sheet for PAGP along with other reference materials can be found 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 today. Earlier this morning, we reported solid second quarter adjusted EBITDA attributable to Plains of $672 million, which I will cover in more detail. In June, we announced the execution of definitive agreements to sell substantially all of our NGL business to Keyera for approximately USD 3.75 billion with an expected close in the first quarter of 2026. Initial investor feedback has been positive, and we view this as a win-win transaction for both parties. Plains will exit the Canadian NGL market at an attractive valuation while Keyera will receive highly complementary and critical infrastructure in a strategic market. From a Plains perspective and as highlighted on Slide 4, this transaction will result in a streamlined crude oil midstream entity, with less commodity exposure, a more durable and steady cash flow stream and substantial financial flexibility to further execute on our capital allocation framework. With approximately $3 billion of net proceeds from the sale, we expect to continue focusing on disciplined bolt-on M&A to extend and expand our crude oil-focused portfolio as well as opportunities to optimize our capital structure, including potential repurchases of Series A and B preferred units along with opportunistic common unit repurchases. Building upon the foundation of our disciplined capital allocation framework, we announced a bolt-on acquisition of an additional 20% interest in BridgeTex Pipeline Company LLC, for an aggregate cash consideration of $100 million net to Plains. This brings our overall interest in the joint venture to 40%. Both Plains and ONEOK have extensive upstream gathering systems, and both companies are committed to optimizing the operating capacity on the pipeline. In addition, this transaction is expected to provide risk-adjusted returns in line with Plains' bolt-on framework. Year-to-date, we've completed 5 bolt-on transactions, totaling approximately $800 million and we've consistently maintained the view that there is a runway of opportunities for Plains to advance its bolt-on strategy. As illustrated on Slide 5 and has proven over the last few years, we continue to execute on that backlog of opportunities. Additionally, the financial flexibility that will be created by our recent NGL announcement further enhances our commitment and capacity to pursue these and other opportunities provided they offer the attractive returns. With that, I'll turn the call over to Al.

Thank you, Willie. Prior to discussing further details of our second quarter results, I would like to reiterate that following our NGL announcement, the majority of the NGL segment has been reclassified as discontinued operations. To ensure consistent financial disclosure to the market, we have also included pertinent information reconciling these changes with our original 2025 guidance for the NGL segment. Turning to the second quarter. We reported crude oil segment adjusted EBITDA of $580 million, which benefited sequentially from Permian volume growth, contributions from recent bolt-on acquisitions and higher throughput associated with our refining customers returning from downtime in the first quarter of 2025. Moving to the NGL segment. We reported adjusted EBITDA of $87 million, which stepped down sequentially due to normal seasonality and lower quarter-on-quarter frac spreads. Slide 6 and 7 in today's presentation contain adjusted EBITDA walks that provide additional details on our performance. Regarding guidance, our full year 2025 EBITDA range of $2.8 billion to $2.95 billion remains intact. Consistent with our communication last quarter, in the prevailing environment, both our EBITDA guidance and the Permian growth outlook of 200,000 to 300,000 barrels per day would likely be in the lower half of their respective ranges. A summary of our 2025 guidance metrics are located on Slide 8. As for capital allocation, which is illustrated on Slide 9, for 2025, we expect to generate approximately $870 million of adjusted free cash flow, excluding changes in assets and liabilities. Our adjusted free cash flow guidance reflects the impact of bolt-on acquisitions including the acquisition of the interest in BridgeTex Pipeline as well as our revised 2025 growth capital guidance, which has increased $75 million to $475 million. The capital investment increase is primarily associated with new projects, including Permian and South Texas lease connects and Permian terminal expansions in addition to weather delays and scope changes on other projects. While 2025 growth capital was above our initial guidance, maintenance capital is trending closer to $230 million, which is $10 million below our initial forecast. With that, I'll turn the call back to Willie.

Thanks, Al. As illustrated on Slide 10, we've made significant progress on our strategy over the last several years. This begins with a portfolio of world-class assets where value has been unlocked for the capabilities of our Plains team along with collaboration with our customers. Our strategy is grounded in our established financial priorities with a focus on generating substantial free cash flow, maintaining financial flexibility and increasing return of capital to our unitholders through disciplined execution in each of these areas. The divestiture of our NGL business marks a significant step in the strategic direction of Plains, by reallocating resources and capital towards our legacy crude oil operations where we have significant size and scale, we will be better positioned to enhance our focused portfolio, this move not only increases our financial flexibility, but it also underscores our resolve to streamline operations and drive growth while generating strong returns for our unitholders. Our strategy centers on the view that crude oil will remain essential to global energy and society for decades. Despite near-term volatility, we're confident in our ability to navigate current market dynamics, and we expect fundamentals to improve longer term due to continued population and economic growth driving demand. We anticipate that new OPEC+ supply will be absorbed reducing spare capacity and limited long lead project and resource additions will increase the reliance on North American onshore production. Plains will continue to be a vital infrastructure provider to meeting the growing need for reliable energy across global markets. In closing, our efficient growth strategy, financial flexibility, and commitment to execution have positioned us well to capitalize on opportunities, manage challenges with resilience. I'm confident in our position and at this point, we'll look forward to your questions. Blake, would you lead us into Q&A.

Thanks, Willie. The IR team will be available after the call to address any additional questions you may have. Latif, could you please open the call for questions?

Our first question comes from Manav Gupta of UBS.

This is Shneur on for Manav. When you think about assets in the Mid-Con, there may be more one-time step-ups in synergy versus the Permian that could have more organic growth on top of that. So when we look at more bolt-on strategies and M&A, how do you factor in the sensitivity to basin-level growth? And in general, what basins are you seeing more growth in over time?

Shneur, this is Jeremy. Here's what I would say: we take all that into consideration. And candidly, as we've said before, we're a DCF shop, and we're looking for discounted cash flow over time and contributions. You have to look at the integrated network. So take the Mid-Continent, for instance, with your example, we have a lot of assets that touch a lot of other areas. So things that could impact Cushing or other downstream pipelines may have multiple touch points. So while the Permian has different resources. We look at them independently and use market fundamentals to drive an outlook of cash flows, and we use a discounted cash flow, and we have to beat our return thresholds. Our cost of capital by 300 to 500 basis points as we've said. So we take all that into consideration. We're not necessarily going to say where our target area is right now, but we do look at everything, and we've got to hit our return thresholds, and we certainly take a look at fundamentals and multiple touch points have in each area.

Got it. Could you provide some insights on real-time demand signals and whether you are noticing any signs of slowdown in refining or exports?

Yes, this is Jeremy again. I would say to keep an eye on the refiners. They have all mentioned that diesel demand is improving and feels strong. The last six months have shown significant improvement compared to the previous six months in terms of demand. We haven't witnessed the anticipated slowdown in demand and expect that to persist. Willie mentioned this in his notes as well. So, I recommend continuing to monitor the refiners regarding their demand. We are not experiencing any issues from the downstream refining signals affecting crack spreads, both internationally and domestically, although differentials do indicate some variations. Over the past six months, we've seen increased demand, and we are optimistic about that trend continuing.

Yes, Shneur, this is Willie. One comment I would add to that is we're all watching a lot of uncertainty certainly over the last number of months and even years. Our view is continued short-term volatility, longer term, more constructive. And what I would tell you, our view is despite a lot of the uncertainties, I have more confidence in the world and its ability to continue to grow than I did probably over the past year. So our views are pretty constructive, but still think there's going to be a lot of volatility short term.

Our next question comes from the line of Gabriel Moreen of Mizuho.

Can I just ask on the BridgeTex? And maybe just talk about how that pipe is situated currently contractually maybe how it would fit with the rest of your business? The value also seemed to be a little bit a change from what may have transacted out in the past. So if you can speak to that as well?

Gabe, this is Jeremy. We're excited about the outcome, consolidating that interest with ONEOK. I think it's best for them to handle the contracting perspective. As part of this transaction, we collaborated with ONEOK to optimize the cost structure moving forward and to explore commercial methods to fill the pipeline from United Plains and ONEOK's gathering systems to ensure it stays full. I believe that our collaboration will enhance the pipeline's positioning in the long term.

And then maybe if I can ask in terms of some of the CapEx ins and outs on the growth CapEx raise here. But the lease connects in South Texas and the Permian, does that imply some degree of greater activity than you had been seeing? Or is it just some degree of noise in terms of just things going on during the course of the year?

Gabe, it's Chris Chandler. I'll take this one. So yes, we have increased our 2025 investment CapEx guide to $475 million net to Plains. We've developed some new opportunities related to the Permian and Eagle Ford gathering, as you mentioned, in additional storage opportunities in the Permian. Some of this is basin growth related, but some of it is, frankly, capturing business that we did not have before. They're good investments. They exceed our return thresholds, and they weren't in our original guidance, hence being a new opportunity. So I hope that helps.

Our next question comes from the line of Michael Blum of Wells Fargo.

Willie, I wanted to ask kind of a big picture question. You addressed some of this at the end of your remarks, but you've made a big step here. You've exited the NGL business in Canada. You're now more or less solely focused on crude. So my question is, is the plan to simply execute the growth and capital return strategy as you've been doing? Or could you see the company pivoting or diversifying into another area, whether that be expanding the crude footprint more expansively or getting into a whole different line of business? Just want to get your sort of high-level thoughts there.

Our goal has always been to generate value for our unitholders, not strictly to become a pure play. We've set forth a growth strategy that we are currently implementing to unlock value. Currently, our business comprises about 80-85% crude and 15-20% NGL. The recent transaction opens up numerous opportunities for us within Plains, which is why I emphasized this in my prepared comments. We plan to redeploy approximately $3 billion, though I can't provide specifics on how it will be used just yet. There are several opportunities we've identified, including bolt-on acquisitions, adjustments to capital structure, and opportunistic unit buybacks. Given the strong cash flow we've realized at a favorable valuation, we believe we can achieve even better results by reinvesting in the liquids sector. Creating value revolves around synergies, and it's tough to capture those without a strong position. Essentially, we're committed to our core strengths. We have a significant presence in the industry, offering a variety of services to our customers, and we intend to leverage that to strengthen our operations based on our positive outlook for the oil markets. We are open to exploring opportunities in other areas or commodities, and our business development team is actively engaged in that, but we anticipate focusing more on our crude assets moving forward, as we believe there are ample opportunities ahead. I hope that clarifies things.

It is. And then second, I wanted to ask, and I might be picking here, so apologies upfront. But on Slide 9, the language on distribution growth changed a little bit. It used to say targeting multiyear sustainable distribution growth and this later slide deck is targeting sustainable distribution growth. So I just want to see if there's a shift in messaging there that we should be aware of?

Michael, this is Al. No intended shift in messaging at all. We intend to grow our distribution over a multiyear period. So no intent there. Clearly, in the very interim time, as Willie mentioned, we need to redeploy these proceeds, we fully expect to redeploy them in a way that's accretive to DCF, which would further enhance our ability to grow the dividend.

Our next question comes from the line of Spiro Dounis of Citi.

I want to first ask about the second half of '25. The guidance seems to suggest maybe a similar second half to the first half, if not maybe even a little bit lower. And so I'm curious, is that consistent with how you're doing in the back half of the year? And I guess why would that be the case? It seems like volumes are trending up kind of nicely this quarter, really, I know you mentioned some volatility out there. So maybe it's just that. But you've also got the contribution from some bolt-ons. So just going to get some color there in the back half.

Spiro, it's Jeremy. Just remember, we have the contract roll-offs of Cactus II and Cactus I and Sunrise in the second half of the year, all consistent with guidance. So those roll off of the contract rates, all those volumes have been re-contracted. It's a function of rates being lower. So you had those contributions in the first half, you're going to have the growing production the FERC escalator and other pieces contributing to backfill that. So while it may look flat, you backfilled some of the roll-off of the contracts with growth.

Got it. Super. Second question, just maybe going to the bolt-on strategy again. I guess, how should we think about your ability to keep doing these bolt-ons for the rest of the year pending that NGL sale? I don't imagine you want to pre-spend that $3 billion. But as you do think about getting those proceeds, you could obviously do a lot more than a bolt-on with that $3 billion. So I guess I'm just curious how you're weighing the ability or maybe the potential to do something larger?

Well, Spiro, it's very difficult to time all these things, as you well know, which is why I mentioned our robust BD team looking at a lot of things. What I would tell you is that's the other reason for our financial flexibility, creating a lot of capacity on our balance sheet to be able to absorb some of that. So where I think we're positioned is we look at a lot of opportunities. And as they come up, we're trying to put ourselves in the best position to be able to execute on them, whether they're small, medium or even large. So I'll leave it at that.

Our next question comes from the line of Sunil Sibal of Seaport Global.

And most of my bigger questions have been hit, but I just wanted to clarify a couple of things. On the BridgeTex, so you're buying that as part of the Oryx JV? Correct?

Sunil, this is Jeremy. No, that's independent. That is Plains purchasing that we're an existing owner in the JV. And ONEOK and Plains are buying in proportionate to their interest in the pipeline.

Okay. Understood. And then in terms of the overall positioning, it seems like you're still retaining some U.S. NGL business. If that's correct, is there a bigger strategy there? How should we think about that piece of the business going forward?

Sunil, that's a minor aspect relative to our entire asset base. Those were smaller contributors. From both a tax and operational standpoint, it made sense for us to hold onto them, and we plan to monetize those at a later date. However, I would emphasize that they are not part of the larger portfolio, and we are more likely to divest them while retaining others.

Our next question comes from the line of John Mackay of Goldman Sachs.

I wanted to revisit the CapEx aspect for this year. How much of the increase do you attribute to an overall rise in producer activity compared to your expectations? Or is it more about your specific commercial successes, without indicating a broader trend? Also, looking ahead, why shouldn't we anticipate that the run-rate CapEx could increase a bit if you achieve these successes?

John, it's Chris Chandler. I'll take that. It's really a combination of all the above. The factors that you mentioned. There are certainly new opportunities that we didn't anticipate coming into the year and those played a role. I'd also point out our continued bolt-on acquisition strategy brings new opportunities for synergy capture and expansion around those assets where we didn't have operations before. So it's really kind of all of the above. When you think into 2026 on investment capital spend, we're obviously not giving guidance at this point in time. We'll do that in early 2026. You can look at how much we're spending on NGL this year, which is above average compared to prior years. So we would expect that to step down when the NGL sale to Keyera closes. But we continue to be successful in identifying new opportunities. So in respect of identifying and capturing those projects that meet our investment thresholds. We'd love to grow CapEx modestly because of the good opportunities that we're able to capture.

John, it's Blake. If you don't mind real quick, I would add, just as a reminder, the '25 CapEx program includes about $30 million or $40 million of deferrals from last year. So that might help you think about the progression into '26.

That makes sense and is helpful. Regarding your comments on the retained NGL assets, your previous answer was clear, and I understand they are small. Could you provide a quantification of what that looks like right now? Additionally, does any of that reflect a '25 spread environment, or is the figure you share a good estimate for the foreseeable future?

I'd put that in the $10 million to $15 million of the EBITDA category and just from a valuation standpoint, think of the $100 million to $200 million range.

Our next question comes from the line of Brandon Bingham of Scotiabank.

Just one quick one for me. I know it says in the slides that you still expect to come in towards the lower end of the EBITDA guide, but things have improved even just slightly versus all the 1Q chaos. So just kind of curious where you see that as we move forward throughout the year and whether or not there's a higher likelihood now that we could be back towards the midpoint?

This is Al. I'll take a shot at it. I think the wording should have been lower half. So we weren't trying to point at the low end by any means, if that's what the question was. And we believe the lower half would be how we're trying to guide it. We're not trying to guide you to the midpoint or the bottom end, but just the lower half. Clearly, there's a period of time here, prices have been fairly volatile. I think crude oil today is roughly where we articulated the range to be a quarter ago in the $60 to $65 range. I think we're kind of at the high end of that now. So more time to come with regard to that, but we would kind of point you to the lower half, not the lower end.

Latif, thanks, and thanks to everyone for joining us today. We'll look forward to giving you more updates and we'll see you on the road. Have a great day and a great weekend.

This concludes today's conference call. Thank you for participating. You may now disconnect.