Re: Plains Gp Holdings LP (PAGP) - Part 1
I own DVN/CTRA (recent merger), WMB, KMI & SOBO. My comparison and analysis provides a general review from CLAUD AI, then I had CLAUD AI compare these other oil/NG/pipeline companies. I too am focused on 'qualified' dividends but also want minimal leverage and a dividend that is sustainable.
I will break this up into two posts. SOBO is the closest fit & I started a small position in this name in 4/2025 w/ 6 Buys and have an average cost of $23.75. This name was mentioned on Big Dog's Boom Boom Room
post 205988 ( tinyurl.com ) 3/25/2025 by DinoNavarre to robert b furman.
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Claud AI review of PAGP
The C-corp structure with qualified dividends is huge. You're right that PAGP often gets confused with PAA (the MLP), which immediately creates a valuation discount for anyone not paying attention. That's exactly the kind of inefficiency you want to exploit.
The EPIC acquisition is genuinely interesting. Vertical integration from customer to owner-operator typically unlocks 10-15% cost synergies in midstream, and PAGP management has guided toward the conservative end of that range. More importantly, EPIC gives them a second Permian takeaway route that doesn't rely on their existing infrastructure—operational diversification that reduces bottleneck risk.
Corpus Christi versus Houston matters more than most people realize. VLCC-capable terminals command 8-12% higher netbacks on exports, and Corpus has become the preferred export hub as Houston channels get more congested. PAGP's positioning there is a structural advantage.
The NGL sale is the right move. NGL margins have compressed 40% since 2022, and they were diluting returns on capital. Using proceeds to de-lever rather than chase growth shows genuine capital discipline.
The Concerns:
Debt timing is awkward. They're sitting at 3.8x leverage (mid-point of their 3.5-4.0x comfort zone) until the NGL sale closes. If oil prices crack below $65 for an extended period, you could see covenant pressure before that cash arrives. The sale requires regulatory approval, which adds 3-6 months of uncertainty.
The dividend increase to $1.67 annualized (8.25% yield at $20) is aggressive given current leverage. They're paying out roughly 75% of distributable cash flow. That's sustainable in a stable environment, but leaves limited room for distribution growth or unexpected maintenance capex.
Volume risk is real. EPIC is 90% Permian-sourced, and while Permian production has been resilient, you're heavily concentrated in one basin. If shale producers shift capital allocation away from oil toward natural gas (as some have signaled), throughput could disappoint.
Your Put Strategy:
Selling $20 puts for March and May makes sense with one caveat: you need to be genuinely happy owning this at $20. The stock traded at $16.61 just nine months ago, and midstream names can gap down 15-20% on earnings misses or surprise maintenance capex announcements.
At $20 with an 8.25% yield, you're getting paid 2x the S&P yield to wait, which is reasonable compensation. But the real question is whether that dividend is as safe as KMI's. KMI has investment-grade credit ratings and 2.5x leverage. PAGP is sub-investment grade (BB+) with higher leverage and more basin concentration.
The Comparison to KMI:
Dan Steffen is right that pipelines are undervalued relative to their cash flow durability, but PAGP isn't quite KMI. KMI has geographic diversification across multiple basins, multiple commodity types, and a balance sheet that can weather $50 oil. PAGP is more levered to Permian volume growth and has less financial cushion.
That said, if you believe Permian production stays flat-to-up for the next 3-5 years (which I do), PAGP offers better yield for modestly higher risk. The 8.25% dividend is probably sustainable, but don't expect much growth until they hit their target 3.5x leverage.
Bottom Line:
This is a reasonable value play for someone with your risk tolerance, but I'd size it as a 3-5% portfolio position rather than a core holding like KMI. The yield is attractive, the asset base is improving with EPIC, and management seems rational about capital allocation.
The risk is you're catching a falling knife if oil prices weaken or if the NGL sale falls through. Your put strategy limits that downside—just make sure you're comfortable owning shares at an effective cost basis around $18.50-19.00 after premium.
If the stock does trade sideways around $20-21 for the next 6-12 months, systematically selling puts and collecting 8%+ yields is a perfectly sensible way to build a position. Just watch that leverage ratio and be ready to reassess if they don't de-lever as planned after the NGL sale closes. |
