There are no sure things in MLP land, or in any other corner of the financial arena. But you could get pretty close if you placed top-notch management at the helm of a large, geographically diversified midstream energy business with a solid balance sheet, decent yield, committed large customers and numerous growth opportunities arising from the boom in domestic crude production.

There are several companies and partnerships to which such a description might apply, and most of them we already recommend. But Plains All American Pipeline (NYSE: PAA) somehow hasn’t made the cut to this point. That’s changing as of now, because it is no longer possible to ignore PAA’s many strengths.

These start with a trans-continental footprint that gathers crude in every major North American production basin and moves it by pipeline, rail and barge to the refining and marketing centers on the coasts. Much of this business (70% or so this year) is based on fixed-fee commitments, long-term ones in the case of PAA’s many logistics hubs, storage terminals and processing plants. The other 30% typically  comes from the gains on marketing the crude and natural gas liquids the partnership buys at the wellhead and then moves to the most profitable likely sale location via its nearly 17,000 miles of pipeline, barge fleet and rail network.

The Plains Playbook

Source: partnership presentation 

Plains All American also owns gas processing plants and gas storage facilities, but crude is its bread and butter. With US crude output forecast to increase 10% this year and a further 12% over the next two, demand for the partnership’s transportation and marketing services is also likely to increase.

PAA also owns a big and expanding oil condensate stabilization facility in South Texas that should make it one of the primary beneficiaries of the recent move to permit processed condensate exports. And as the glut of domestic light crude grows, PAA is sure to be a major player in moving and blending this rising tide for US refiners targeting exports of refined products.

In anticipation of this business, Plans invested $1.6 billion last year in organic growth projects, and has ramped that up to nearly $2 billion this year. It will spend $480 million to expand its market-leading midstream infrastructure in the Permian Basin of West Texas, and another $350 million on a new pipeline linking that basin with its joint-venture facilities in the Eagle Ford, which is also where its condensate stabilization towers are located. From there, crude and condensate could flow to the nearby port of Corpus Christi or else Houston.

The ongoing capital spending spurt is based on the tangible needs of oil producers and refiners, and should provide a strong boost to the partnership’s profits in the years to come, with expected rates of returns averaging roughly twice PAA’s 6.8% cost of capital.

Thanks to the $2.2 billion of cash flow PAA retained and reinvested over the last decade, much of its from its marketing profits windfall over the last three years, distributions per unit are already growing briskly, forecast to increase 10 percent this year.

PAA units already yield 4.6%, quite generous given that growth, the partnership’s financial strength and the yield chase evident in the current bull market. This year’s forecast is targeting distribution coverage of 1.11x for the year. Leverage is reasonable, with long-term debt at 3.4 times this year’s forecast adjusted EBITDA. PAA’s investment-grade credit ratings are among the MLP sector’s highest. And it raised a hefty $300 million via at-the-market unit sales during the most recent quarter, enough to make secondary offerings unnecessary for the balance of the year except to finance a major acquisition, which management has signaled is unlikely.

Experienced and well-regarded management is a key PAA intangible asset. CEO Greg Armstrong is a 33-year veteran of PAA and its corporate predecessors, and is widely respected as one of the sharpest minds in the midstream business.

While he can’t do much about the recent shrinkage in regional crude differentials — and with them of PAA’s marketing profits — given the arrival of new pipeline and rail shipment options for shale drillers, Armstrong has been investing heavily in the partnership’s fee-based business, and so far these investments are on track to pay off handsomely.

Second-quarter adjusted cash earnings beat the company’s forecast and analysts’ expectations, helped by marketing profits that declined less than projected, although they remained down year-over-year.

This year’s predicted 10% growth in distribution per unit is only slightly above the average for the last decade and given the spike in capital spending the distribution gains are unlikely to slow any time soon.

Longer term, Plains All America would be vulnerable to a downdraft in oil prices severe enough to slow North American production, which the partnership notes could happen at some point in the next few years. Conversely, if improvements in drilling techniques and efficiency keep production growing above government estimates, as has recently been the case, PAA could exceed even today’s high expectations.

The bottom line is that this conservatively managed large-scale crude shipper and merchant provides a decent, relatively safe yield with solid growth potential. The units have recovered from last year’s weakness and should outperform in the near term as the price catches up to some of the sector’s more overextended favorites.

We’re adding PAA to the Conservative Portfolio. Buy below $67.

One strike against PAA is that, unlike top picks Enterprise Products Partners (NYSE: EPD) and Magellan Midstream Partners (NYSE: MMP), Plains All American has a general partner that will siphon off a growing share of its profits via incentive distribution rights.

As the example of Kinder Morgan (NYSE KMI) shows, over the long term such payments can raise the cost of capital, distort decision making and necessitate restructuring.

But in the here and now, Plains All American general partner, Plains GP Holdings (NYSE: PAGP) is capitalizing on the distribution growth at PAA to increase its own smaller dividend even faster. Although PAGP currently yields only 2.5%, it’s on track to raise its dividend 25% this year. The share price has rallied 32% since the October IPO of a minority stake by owners including venture funds as well as Occidental Petroleum (NYSE: OXY).

Floating a chunk of PAGP provided a market basis for its price, and over the longer run its not a stretch to think that PAA might buy PAGP out.

Even if that’s not in the cards, there is a tax shield in place that will classify PAGP dividends as a tax-free return of capital at least through 2016 and possibly as late as 2022. A 2.5% tax-free dividend growing at 20-25% a year and offering upside from a big acquisition at PAA is more than a buy, it’s our new #10 Best Buy. We’re adding PAGP to the Growth Portfolio. Buy below $33.