Why Enterprise Products Partners LP Is Now the Best-of-Breed Pipeline

It was about a year ago when the unit price of Enterprise Products Partners (NYSE: EPD  ) began to diverge away from its larger peer and longtime best-of-breed pipeline Kinder Morgan Energy Partners (NYSE: KMP  ) . Since January, the divergence between the two units has been very significant. 

Source: YCharts

As you can see above, Enterprise Products Partners units have risen by more than 70% since the beginning of last year, whereas Kinder Morgan's general partner shares have hardly budged. Since that time, Kinder Morgan Energy Partners has lost its premium to the other pipeline partnerships.

Enterprise, meanwhile, now trades at a premium to the others. For evidence of this, simply take a look at the difference in yield between Enterprise and virtually all other pipeline partnerships. Enterprise yields less than 3.9%, while others such as Kinder Morgan Energy Partners still yield more than 5%. This article will explore some of the reasons why the market has clearly chosen Enterprise over the previous heavyweight Kinder Morgan. 

A natural gas pipeline under construction in Michigan. Source: Flicker

Rock-solid coverage
A big reason for investing in a pipeline master limited partnership, or midstream MLP, is for steady and dependable income. Both Kinder Morgan and Enterprise fit this bill: Both have continued to raise distributions each year for at least the last few years. Neither have experienced disruptions in payments.

However, Enterprise's distribution is much better covered than Kinder Morgan's. Kinder Morgan's distributable cash flow, or DCF, is almost always 1 or 1.01 times distributions. Enterprise, however, makes sure to always keep a cushion: Last year Enterprise's DCF was 1.5 times distributions. At no point has Enterprise's DCF gotten below 1.2 times distributions, not even in 2009. The market is more than willing to pay up in order to 'sleep well at night.' Enterprise seems to understand this better than anyone else in the midstream MLP space. 

Source: Investor relations

Simple is best
Take a look at Enterprise's partnership structure. Pretty darn simple, isn't it? Both EPCO and the public are limited partners and neither gets distribution priority. In fact, there is no distribution priority at all. Compare that with the Kinder Morgan family of companies: there are actually four different ticker symbols, and KMI, the general partner, has incentive distribution rights over the others. In other words, KMI gets its distributions first. 

Just pipelines, OK?
Another point of difference between Enterprise and Kinder Morgan is that Enterprise is strictly a builder of pipelines. In fact, Enterprise rarely ever acquires others' pipelines and prefers to build its own integrated systems. Contrast that with Kinder Morgan, which not only acquires other pipelines but also invests in non-pipeline assets such as domestic oil-tank ships and CO2-injection oilfields. And while Kinder Morgan's CO2 fields provide -- easily -- the highest return on investment within that company, the market frowns upon such direct commodity exposure. 

Final thoughts
It should come as no surprise that midstream MLP investors are risk-averse and prefer the simple over the complex. Little wonder, then, that Enterprise has continued to be in high demand among investors.

Personally, I like Kinder Morgan. The company's CO2 operations are fantastic, and as a unitholder in Kinder Morgan Energy Partners,  I am happy that management has those high-margin oilfields. In addition, despite having little margin for error, Kinder Morgan has delivered on its distribution promises year in and year out for 17 years. This market, however, prefers Enterprise Products Partners, and it's not too hard to see why.

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Read/Post Comments (3) | Recommend This Article (4)

Comments from our Foolish Readers

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  • Report this Comment On May 16, 2014, at 1:30 PM, traintomonac wrote:

    Looks like Kinder's four entities is a little too much. KMP yields 7.5% currently. A nice premium over EPD's 3.9%. If you went shopping for income, why did you end up buying growth?

    The GP's rights to incentive distributions are not are not ahead of limited partners claims. Payments to both are split according to established proportions as certain payout levels are attained. The IDR payment increases as the distribution increases. At the lowest payout levels, the limited partners get the vast majority of the distribution. So really, the limited partners have claim on the first dollars. From then on, it split according to schedule. Its not like senior debt's priority claim over junior debt.

    I'm not so sure that EPD build only, don't acquire, growth policy is such an advantage. Kinder can do both, and does.

    Confused about Kinder's multiple securities? Buy one and follow it. In no time you will understand which one you own and why.

  • Report this Comment On May 17, 2014, at 10:24 AM, HoerthCM wrote:

    There are no buy recommendations here, traintomonac.

  • Report this Comment On June 03, 2014, at 9:46 AM, chopchop0 wrote:

    "In fact, Enterprise rarely ever acquires others' pipelines "

    Not really true. They used to do this a alot more. I got into EPD in the high $20's when my TPP shares (Teppco) were bought out by them.

    And if you want to see an even better breed midstream MLP than EPD, check out MMP (Magellan)

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