Enterprise Products Partners L.P. (NYSE: EPD) and Magellan Midstream Partners, L.P. (NYSE: MMP) are two prominent midstream oil and natural gas partnerships. They each offer investors fat yields and long histories of regular distribution increases, though Enterprise's 6.3% yield is better than Magellan's 5.1%. However, there's a lot more you need to know about these two partnerships before you pick one over the other. Here's a quick primer.
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Without question, Enterprise is the larger of the two names here with a $57 billion market cap. It is, in fact, one of the largest and most diversified midstream players in North America. Its vast tentacles reach into pipelines, storage, ports, processing, and transportation via a fleet of sea tankers. Having exposure to so many different areas of the midstream business gives Enterprise an inherent advantage in business stability and on the growth front.
Once a new asset is acquired or built, or an existing facility is expanded, the big boost to the top and bottom lines is over. Small incremental price hikes is all you can expect from that point from these largely fee-based assets. Having a broadly diversified portfolio gives it more areas into which to expand and thus more levers to support long-term growth.
Its current size, meanwhile, shows just how well management has run the partnership over time. But for investors, the real success shows up in Enterprise's 20-year history of annual distribution increases, within which there's a 62-quarter streak of consecutive hikes. The long-term rate of distribution growth is in the mid-single digits. However, the last distribution hike came with a caveat: Distribution growth is going to slow down over the next couple of years.
Partnerships are designed to distribute most of their cash flow to unitholders. That means that capital markets have to be tapped for growth capital. A key part of this is issuing new units, a move that dilutes current unitholders. Over the last five years, Enterprise's unit count has increased by roughly 17%. The partnership wants to shift gears so that it can self-fund more of its capital needs and is thus planning to slow its distribution growth to the low single-digit range for a little while.
There's no question that Enterprise is a well-run partnership appropriate for conservative investors seeking income. This is a tortoise, though, that will be crawling extra slow over the near term. And even in the best of times, distribution growth probably won't go higher than 5% or so. This is where Magellan comes in.
A notably faster pace
Magellan, at a roughly $19 billion market cap, is much smaller than Enterprise. Its business is diversified, but not nearly as diversified as Enterprise's operations. That said, it has a long and successful history of growth, which is evidenced by its 17-year track record of annual distribution increases (there's been an increase every quarter since it came public in 2001). Over the past decade, the distribution has grown at around 10% annualized. That's roughly three times the historical rate of inflation growth and nearly twice as fast as Enterprise's.
The current goal, backed by over $1.1 billion in spending plans in 2018 and 2019, is to increase the distribution by around 8% a year. If you reinvest those dividends, it starts to reach that historical 10% rate. So faster distribution growth is one reason to prefer smaller Magellan. Note that the law of large numbers also means that growing Magellan's relatively small business will be easier than growing Enterprise's Goliath asset base.
But there are two more pieces to the puzzle here. First, Magellan is one of the least levered midstream players in the industry. This is evidence of management's conservative approach. It's also been very judicious when it comes to issuing new units. Over the past five years, the unit count has increased by roughly 0.5%. These facts help explain the higher distribution growth rate, too, since less debt and fewer shares mean there's more money available to pass on to current unitholders.
If you don't mind accepting a slightly lower yield up front, Magellan is a conservatively run partnership that will reward you with higher distribution growth prospects over time. That, in my mind, gives it the edge over Enterprise. This is doubly true now that Enterprise is trying to shift gears and fund its growth using a more Magellan-like approach.
They're both good, but...
In the end, both Enterprise and Magellan are very well-run partnerships and either would be an appropriate holding for even the most conservative investors. Enterprise's vast diversification might give it an edge if that's important to you. However, in my opinion, Magellan's conservative financial profile, higher yield, and the fact that it already has a model built around self-funding make it the better choice for most investors today.
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