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.
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 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.
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.
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.
Casey Hoerth owns shares of Kinder Morgan Energy Partners LP. The Motley Fool recommends Enterprise Products Partners L.P. and Kinder Morgan. The Motley Fool owns shares of Kinder Morgan. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.