The Midstream Energy Play That Keeps Powering Higher
Energy has experienced a 0.85% loss, making it the second-worst performer among the 11 sectors of the S&P 500 this year. Much of that is attributable to the oil majors’ lackluster performances in 2025. ConocoPhillips (NYSE: COP) is down 6.17% and ExxonMobil (NYSE: XOM) is down 0.48%, while Phillips 66 (NYSE: PSX) and Chevron (NYSE: CVX) have uninspiring gains of 4.13% and 5.66%, respectively.
That soured the highly cyclical sector for many investors. But for those who understand the three stages of the petroleum value chain, the midstream segment still offers hope. Specifically, Houston-based Plains All American Pipeline (NYSE: PAA), a master limited partnership (MLP) founded in 1981, should be on income investors’ radar.
Production Remains High Despite Surplus
Energy’s surplus carried into 2025. This year, the global oil supply could exceed demand by roughly 600,000 barrels per day. That’s likely to be compounded by OPEC output increases later this year, which should keep prices under pressure.
Combined with ongoing geopolitical conflict, this has translated into trouble for upstream and downstream operators. Upstream companies are facing production declines from existing fields, while downstream companies are grappling with competition from renewables and fluctuating prices.
West Texas Intermediate crude is trading at $63.35 a barrel—down a steep 45% from its 2022 five-year peak of $116.15. Brent crude isn’t far behind at $66.38, marking a 44% drop from its own 2022 high of $118.67.
But for midstream companies, those factors are less impactful. And with production remaining near all-time highs, demand for storage and transportation is intact.
Big Dividend Offsets Slow Q2
On the surface, there’s been nothing extraordinary about PAA’s 3.12% year-to-date (YTD) gain. But like the energy industry in which it operates, much of its reward is beneath the surface. As an MLP, it must pay shareholders 90% of its income as dividends. For PAA, that dividend currently yields 8.51%, or $1.52 per share per year.
Through its subsidiaries, PAA transports, terminals, stores, and gathers crude oil and natural gas liquids (NGL) through pipelines in the United States and Canada. Those two segments, crude oil and NGL, have seen ups and downs over the past year, which resulted in a mixed bag when the company announced its Q2 earnings last week.
But shareholders still enjoyed EPS of 36 cents, which beat the consensus estimate of 33 cents. Quarterly revenue was down 16.6% year-over-year (YOY) and adjusted free cash flow (FCF) fell 16% YOY. But there was plenty of good to glean from the earnings call as well as the stock’s revised P/E ratio. On a trailing 12-month basis, the P/E was 24.47. Currently, it stands at an extremely attractive 12.54.
Fundamentals Remain Strong
Management confirmed full-year guidance of $2.8 billion to $2.9 billion EBITDA. Drilling down into PAA’s Q2 financials shows plenty of positives:
- Net cash from operating activities increased 6% YOY from $653 million to $694 million.
- Diluted adjusted net income increased 16 YOY from 31 cents to 36 cents.
- Dividend distribution increased 20% YOY from 31 cents to 38 cents.
Despite FCF slipping from the year-ago quarter, that metric expanded dramatically over the past five years. During that timeframe, FCF increased by 58.50% from $776 million in 2020 to $1.87 billion in 2024.
At the same time, Plains All American Pipeline’s net income has ballooned 129.92%, from a loss of $2.58 billion in 2020 to a gain of $772 million in 2024. So while its Q2 results were a hodgepodge, the pipeline and storage operator’s long-term growth trajectory remains unimpaired.
Bolt-on Acquisitions Show PAA’s Growth Focus
Perhaps the most interesting news from PAA’s Q2 earnings call was that it’s exiting its NGL segment in Canada, divesting its holdings for cash considerations of $3.75 billion, which is expected to close in Q1 2026. Those proceeds will be applied to M&A repurchases, which will build on the back of its July 22 acquisition of an additional 20% interest in BridgeTex Pipeline Company, bringing its total interest to 40%.
That M&A news likely played a large role in the company’s Q2 FCF contraction. According to PAA’s earnings presentation, the additional interest in BridgeTex is forecast for a return threshold of 13% to 15%, bringing its total bolt-on acquisitions from 2022 to 2025 to 15.
Analysts are looking beyond the mixed Q2 results, assigning an average 12-month price target of $20.75, or 16.18% upside from today’s price without factoring in PAA’s 8.51% yield.
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