Enterprise Products Partners LP (NYSE: EPD) and Buckeye Partners, L.P. (NYSE: BPL) are oil and natural gas midstream partnerships with long histories of regular distribution increases. Enterprise's annual streak is 20 years and counting, while Buckeye's is even better, boasting 22 consecutive years with an annual increase. You might also select Buckeye because of its 8.8% yield, which is more than 2 percentage points higher than Enterprise's. Before you make that call, you should know these facts.
A bit of risk
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Buckeye Partners, with a roughly $8 billion market cap, is largely focused on owning energy storage facilities. It does own pipelines, and is building a new one right now, but these investments are really secondary to its port storage operations. In other words, if you buy Buckeye, you're basically honing in on just one niche in the midstream space.
That said, unlike most U.S. midstream businesses, Buckeye's operations span the globe. Note that its recent $1.1 billion acquisition of 50% of VITTI materially increased its reach, adding storage operations throughout Europe, Africa, and the Middle East. That global exposure is an added layer of diversification that most other partnerships can't offer. But that "diversification" is still tied to the storage side of the midstream business.
That said, another big issue for Buckeye investors is management's willingness to favor growth over a margin of safety for the distribution. For example, over the past decade Buckeye has been using acquisitions, like the recent VITTI deal, to expand and diversify its business. However, these investments led distribution coverage to fall below 1 in 2013 and 2014. The second quarter's coverage was back below 1, too.
To be fair, the partnership has continued to increase its distribution all along, including in the second quarter. However, coverage below 1 means it isn't covering the payout from the cash flow provided by its operations. If history is a guide, that will be a temporary situation as cash flow from investments and acquisitions kick in. But this is a risk that conservative investors trying to live off income from their investments might not want to shoulder. It could easily keep you up at night.
Don't get me wrong: Buckeye is a well-run partnership. You don't get to 22 years' worth of annual distribution hikes by accident. However, its storage focus and willingness to operate with slim distribution coverage are issues that should keep conservative investors away from its enticing 8.8% yield.
Big and boring
Enterprise, a $56 billion market cap behemoth, is basically at the other end of the spectrum. It is one of the largest midstream players in the United States. Its business spans almost the entire range of midstream assets, including pipelines, processing, storage, and a fleet of ships. Some businesses are larger than others, but the added diversification means there's more balance in its portfolio than what Buckeye offers. And it has more investment opportunities to leverage for growth.
Management also has a track record of running its business very conservatively. The recent energy downturn is a great example. While some energy companies struggled, Enterprise never skipped a beat. Its distributable cash flow, excluding non-recurring items, continued to move slowly higher every year. And it's distribution coverage never fell below 1.2 times, providing investors with a healthy margin of safety even during the energy industry's darkest days.
Interestingly, however, Enterprise didn't just duck and cover. It used the downturn to opportunistically acquire three businesses for around $8 billion (roughly the market cap of Buckeye). So it not only made sure investors' distributions were well protected, but it also invested for the future -- something that will allow it to keep raising the distribution in the years ahead.
Enterprise probably won't ever excite you. But its slow and steady approach in the midstream space is exactly the type of business model that conservative income investors could fall in love with.
Err on the side of caution
Honestly, I'm a fan of Buckeye and its 8.8% yield. But I'm also very cognizant of the risks associated with the partnership's storage focus and slim distribution coverage. Investors who can't stomach watching coverage drop below 1 over the short term as the partnership invests for the future should stick to the larger, more diversified, and more conservative Enterprise Products Partners. Ultimately I think that most investors will be happier in choosing Enterprise. Even with a lower payout now, it's hard to complain about Enterprise's 20 years of consecutive distribution increases and a 6%-plus yield.
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