Plains All American Pipeline Exec Insights: Permian Basin, Product Flows

On Tuesday, Plains All American Pipeline LP (NYSE:PAA) reported its first quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Permian Basin

Darren Horowitz – Raymond James: A couple of questions for you. The first as it relates to what you referenced in your prepared commentary around everything that you all are doing in the Permian Basin. When you’re looking at Permian production forecast trends and you’re talking to producers, I think the consensus is that demand for take-away capacity is certainly outpacing what is currently there and possibly currently under construction, especially given the volume nominations that you mentioned on basin and the upside on Mesa once that West Texas system is expanded. So I’m curious as you look across North and South Spraberry, what you’re doing with the (indiscernible). How much more incremental CapEx do you think is necessary in order to keep pace with the production ramp over the next 18 to 24 months?

Greg L. Armstrong – Chairman and CEO: Darren, if you allow me to, I think I’d probably try and extend the time period for the capital expenditures to probably a three to five-year period. As a practical matter, any capital that you start spending right now to try and solve the problem is unlikely to have a big impact on that roughly 18-month period that you referenced, but more likely to have an impact on a 24 plus month there (when you agree here). So, I’d probably say this, I think in talking with the producers and our customers and potential customers, we’re looking for a fairly significant increase in net production that being net of declines in the area. As we look out, I think if you can envision the balance between supply and demand, it’s going to look a little bit like a saw blade from time to time. There will be – times when production exceeds takeaway capacity and then also you’ll bring on some incremental capacity whether that’s West Texas Gulf or incremental things that we do in the area or the Longhorn pipeline, and all of a sudden you will have takeaway capacity in excess of production. But if the production continues to rise, then it won’t last for long and all of a sudden you’ll end up with another tooth of that production curve moving up there. So, I think, just probably order of magnitude over that three to five year period, another $300 million to $500 million of capital is probably going to be needed to be spent in that area. Again I extended your time period a little bit, but hopefully I was responsive to your question.

Darren Horowitz – Raymond James: No, it is. It’s helpful. I mean, I think, looking across your asset base if you just step aside from the Bakken for a minute, this area and a lot of what’s going on in Mississippi/Lime seems to be one of the biggest aspects of underinvestment relative to production through the drill bit, right.

Greg L. Armstrong – Chairman and CEO: Yeah. I would say this – I think, you can look in West Texas and probably convince yourself that production is going to go – from recently it was under 1 million barrels a day, currently it’s well over 1 million, and 2 million barrels a day is not out of the question.

Harry N. Pefanis – President and COO: It’s probably one of the most active areas as far as rigs are concerned. Just to give you a quick update just on sort of where we see takeaway capacity; there’s probably been 60,000, 70,000 barrels a day of takeaway capacity added from say March to May. When West Texas Gulf gets their expansion complete at year end, there’ll be another 60,000 to 80,000 barrels a day takeaway capacity, Magellan comes on with Longhorn first part of 2013. I think, starting up at 75 and ramping up to 225 through 2013. So, there is some meaningful takeaway capacity that’s going to be added in the next 12 to 18 months.

Darren Horowitz – Raymond James: Then just shifting over to the Bakken for a minute, my last question. I’m just trying to get a sense, I mean, looking at the difference in grade quality pricing of a Bakken barrel relative to others, it seems like that’s one of the biggest arb opportunities in grade and regional dips that we see right now, and I’m wondering is the thought process still there to move those barrels into Patoka and then leverage that Yorktown rail facility, and possibly expand that beyond that 60,000 barrels a day over time. Is that the longer term focus, Greg?

Harry N. Pefanis – President and COO: Hey, Darren, this is Harry. Let me take a crack on that. You know, our first effort is going to be moving volume into Patoka through Bakken North pipeline project. It should be online by the end of the year. We’ve got rail at – rail capacity at Yorktown, we’ve got rail capacity at St. James, and we’ve got a couple other rail projects that we haven’t disclosed yet but that are in the works, so we think a combination of moving crude into Patoka and moving it on rail to the (indiscernible) facilities is going to be probably the most economical and the most efficient way to move the increase in Bakken production.

Greg L. Armstrong – Chairman and CEO: Yeah. Darren, I’d also say and I may sound a little bit at risk of sounding like one of these news shows that always tries to tell you a little bit of a teaser and more news at 10, but one of the things that we’re going to try to do at our Analyst Meeting is demonstrate or actually highlight what we think some of the dynamics are that are going to cause disruptions, not only volumetrically in terms of just takeaway capacity, but the quality of the crude is going to play a bigger and bigger role, and so I think what Harry is alluding to is we don’t think there is any silver bullet solution to any one of these areas, just the opposite. We think you’re going to need maximum flexibility, and you may see crude move east certain times and during certain situations and actually move South or West in other situations, I think, PAA’s asset base is probably as well positioned, and we’re biased but probably better positioned than anybody else is to be able to help balance those markets to get the barrels from where they’re at to where they most likely should be, not just to get them out of the area and that’s part of what we’re going to try to highlight in our Analyst Day on May 30.

Product Flows

Brian Zarahn – Barclays Capital: Just keeping on the subject of product flows, one of your fellow Capline owners talked about publicly the reversal is being examined. Can you talk a little bit more about the thought process behind potentially reversing it, how long it would take of the types of intricacies to keep serving existing customers?

Greg L. Armstrong – Chairman and CEO: I can’t threshold issues. Everybody needs to focus in on – there are three owners in the pipeline and a little bit like it takes the UN to do anything. Everybody has to agree before anybody can do anything. So, it will require an alignment of interest between, BP, Marathon, and Plains to be able to make anything happen. If you assume that issue away, I think then quite candidly it depends on what – how fast something can happen. It depends a little on what the design solution was. If you’re simply trying to reverse Capline and all three owners are in agreement, it’s actually (not the longest) process.

Harry N. Pefanis – President and COO: Six months. That was all we’re going to is just to turn pumps around.

Greg L. Armstrong – Chairman and CEO: But the issue Brian is more complex than that because there are certain flows that are currently going on Capline that you’d need to re-route that continue to need to go north. So, now you’re basically saying that I want to convert existing infrastructure and it maybe a little bit of a gerrymandered solution there to try and get it back up to supply those markets or do I need to build a smaller line going north to offload some of the crude off Capline that’s currently moving north so that you can then covert the big part of Capline to bring it south. That solution range depend on what you come up with could be anywhere from 12 to 18 months to upwards of 24 months plus.

Harry N. Pefanis – President and COO: We also need to some additional capacity to bring crude into Patoka in order to really make Capline reversal to make sense.

Greg L. Armstrong – Chairman and CEO: From the north.

Harry N. Pefanis – President and COO: But from the north, yeah.

Brian Zarahn – Barclays Capital: I know you provide your volumes on a Capline, but do you have a sense of the other owners what kind of volumes you’re seeing, I’m trying to get a sense of the utilization of the system?

Greg L. Armstrong – Chairman and CEO: I think it’s public information. I think overall utilization is probably 50% or little less?

Harry N. Pefanis – President and COO: 30% to 40% probably, it varies by month. We have direct access to our (cheaper) volumes, our direct access to total volumes.

Brian Zarahn – Barclays Capital: Then just going to back to the Permian, can you give little more color on your comments from the basin expansion, is it mostly completed? Do you expect to add all the additional capacity on that system?

Greg L. Armstrong – Chairman and CEO: Do we expect to add the rest of the capacity?

Brian Zarahn – Barclays Capital: As I wasn’t too clear on the comments earlier about, can you talk a little more about where the basin expansion, is it entirely completed or how much – and what’s the current capacity on the system now?

Greg L. Armstrong – Chairman and CEO: Current capacity is 450 – well actually it’s probably just slightly under 450 – our targeted capacity is 450. We’ve got probably 10,000 barrels a day or so of weeks to get it all the way to full capacity. We’ll probably finish those as we conduct maintenance activities – scheduled maintenance activities on line throughout the year. So, we don’t really want to take the pipeline down to finish the (leagues).

Brian Zarahn – Barclays Capital: I saw on your release, you have basin volumes almost of 500,000 barrels a day, was the other 50 from another system?

Greg L. Armstrong – Chairman and CEO: No, it’s the way of (tariff) volumes are measured, okay. We can have volumes come in at Midland, (indiscernible), at Wichita Falls, we can have volumes come in at Colorado City. So they can go in – we have tariff revenues, we have tariff volumes of 495,000 barrels in total. Our share of basin space is 87% of the 450,000 barrels. So our share is little under 300,000 or 400,000 barrels a day. So that’s really, volumes for which we are collecting a tariff is embedded in that 495,000 barrels a day.