Plains All American (PAGP), a major player in the North American midstream energy sector, recently announced a seemingly positive development: the successful re-contracting of its Permian long-haul pipeline capacity, extending its weighted-average contract duration to five years. This news, coupled with strong Q1 2024 results and strategic bolt-on acquisitions, paints a picture of robust growth and consistent free cash flow generation. However, a deeper dive into PAGP's pronouncements reveals a potential red flag for 2026 that may have slipped past the radar of most analysts: a projected flat Crude Oil segment EBITDA compared to 2024.

While not providing formal guidance for 2026, PAGP executives suggested that underlying business growth and contributions from efficient growth investments would offset lower contracted rates on their Permian long-haul pipelines, resulting in a broadly flat EBITDA. On the surface, this seems reasonable, especially given PAGP's focus on operational efficiency and its strategic expansion within the prolific Permian Basin.

However, this seemingly innocuous projection raises a critical question: if Permian production is expected to continue its robust growth trajectory, why wouldn't PAGP's Crude Oil segment EBITDA, which is significantly driven by Permian volumes, experience a corresponding increase? After all, PAGP anticipates capturing an additional 275,000 barrels per day of incremental gathering tariff volumes in 2024 alone, largely driven by Delaware Basin growth.

The disconnect between projected production growth and flat EBITDA hinges on one crucial factor: the re-contracting of PAGP's Permian long-haul pipelines. While the company emphasized that the new contracts secure rates competitive with recently built pipelines, the implicit acknowledgment is a reduction in rates compared to existing contracts.

Here's where the hypothesis gets interesting. If we analyze PAGP's 2024 EBITDA guidance of $2.625 billion to $2.725 billion and assume a conservative 10% annual growth in the Crude Oil segment, driven by the projected 200,000 to 300,000 barrels per day of Permian production growth, we can extrapolate a potential 2026 Crude Oil segment EBITDA of approximately $1.85 billion to $1.95 billion. This represents a potential $100 million to $200 million EBITDA gap compared to the implied flat projection.

Projected Crude Oil Segment EBITDA (Hypothetical)

The following chart illustrates the potential EBITDA gap based on a conservative growth scenario.

Could PAGP be underestimating the impact of lower contracted rates on its long-haul pipelines? Is the anticipated growth from efficient operations and bolt-on acquisitions enough to offset a potentially significant reduction in revenue from long-haul transportation? The answer might lie in PAGP's gathering operations.

The company highlighted a significant surge in basin production, particularly in the fourth quarter of 2023. This surge, coupled with anticipated continued growth, could result in a scenario where gathering volumes increase significantly, even surpassing the capacity of PAGP's long-haul pipelines. In this scenario, PAGP might be forced to operate its gathering systems at higher utilization rates, potentially leading to increased operating expenses and maintenance costs.

Furthermore, if long-haul capacity becomes a bottleneck, PAGP might have to rely more heavily on spot market transportation, exposing the company to price volatility and potentially lower margins. This could further exacerbate the impact of lower contracted rates on long-haul pipelines.

The flat 2026 EBITDA projection might be a calculated gamble by PAGP. The company could be betting on continued robust Permian production growth, expecting that higher gathering volumes will offset the impact of lower contracted long-haul rates. However, this strategy carries inherent risks. If production growth falters, if operating expenses rise significantly due to higher gathering system utilization, or if spot market transportation rates remain depressed, PAGP could face a significant EBITDA shortfall in 2026.

This potential gathering storm highlights a critical aspect of PAGP's business: the interconnectedness of its gathering and long-haul operations. While re-contracting long-haul pipelines at competitive rates might seem positive in isolation, the broader context of gathering system capacity and overall Permian production growth dynamics warrants closer scrutiny.

"Fun fact: Did you know that Plains All American owns and operates over 19,000 miles of pipelines across North America? That's enough to stretch almost three-quarters of the way around the Earth!"