Why Is Energy Transfer Partners the Cheapest MLP Today?

There aren't many ways to measure the value shares of an MLP. Based on these metrics, though, Energy Transfer Partners is the clear winner.

Jul 10, 2014 at 2:02PM


Photo Source: Aurthur Chapman via flickr.com

Measuring risk is quite possibly the easiest thing you can do when looking at a master limited partnership. After all, just about every measurement and metric we use for MLPs -- distribution coverage ratio, debt to EBITDA, Standard & Poor's Credit ratings -- are all related to risk, or more specifically the risk that it will lower its distribution payments. But there aren't many measurements for value when it comes to MLPs. So how do you know if you are paying a premium or a discount for them. Let's take a look at a couple ways we can measure value in a MLP and see why when we stack Energy Transfer Partners (NYSE:ETP) up against Enterprise Products Partners (NYSE:EPD), Magellan Midstream Partners (NYSE:MMP), and Kinder Morgan Energy Partners (NYSE:KMP), Energy Transfer comes out on top. 

Valuation, it's not earnings 
One of the difficult aspects of valuing a master limited partnership is that the metric that we are all so familiar with, the price to earnings ratio, is pretty much useless. In the case of MLPs, available cash is distributed to unitholders, so there are no retained earnings. Instead, let's value them on two other metrics that are a little more representative of MLPs, Total enterprise value to EBITDA and price to distributable cash flow. Total enterprise value to EBITDA measures the ability to generate income from operations when you consider both debt and equity, and price to distributable cash flow measure how much you are paying for the company to generate $1 in cash flow available to unitholders.

One thing to consider with these metrics, though, is that both Energy Transfer Partners and Kinder Morgan Energy Partners have general partners that have incentive distribution rights. So in the case of these two companies, we will look at only the distributable cash flow available to unitholders in the limiter partnership. Since Enterprise and Magellan do not have general partners, they don't need to pay out incentive distribution rights and we don't need to worry about this.

Company Total Enterprise Value to EBITDA (LTM) Distributable Cash Flow Available to Limited Partners (LTM, in millions) Price to Distributable Cash Flow (LTM)
Enterprise Products Partners 18.3x $3,922 18.3x
Energy Transfer Partners 16.6x $1,882 9.6x
Magellan Midstream Partners 21.7x $799 23.1x
Kinder Morgan Energy Partners 12.0x $2,387


Source: Company Earnings Releases and S&P Capital IQ, authors calculations

From an enterprise value to EBITDA value, it's pretty clear that Kinder Morgan Energy Partners generates more profits per dollar of the company than the rest, but not from a price to distributable cash flow perspective. This goes back to those incentive distribution rights. In the first quarter alone, Kinder Morgan Energy Partners paid $467 million in incentive distribution rights and general partner distributions, which takes a large amount of available cash to the limited partners. 

From a price to distributable cash flow ratio, though, its pretty clear that Energy Transfer Partners is by far and away the best bang for your buck when it comes to these MLPs. This isn't too surprising, though, because Energy Transfer Partners has barely seen its distribution grow over the past five years while Magellan Midstream is approaching 75% growth over that same time frame.

Company Distribution growth 2009-2014 
Enterprise Products Partners 30.28%
Energy Transfer Partners 4.62%
Magellan Midstream Partners 72.54%
Kinder Morgan Energy Partners 31.43%

Source: Ycharts

What a Fool believes
When you consider all of these things in context, you can understand why Energy Transfer Partners is valued slightly less than other major pipeline MLPs. But after a five year spending binge on new projects and major acquisitions such as Sunoco Logistics and Susser Holdings, Energy Transfer should start to realize the benefits of these purchases and start increasing distributions on a more regular basis. If it starts to grow its distribution at rates similar to Enterprise or Kinder Morgan, then Energy Transfer could be one of the most undervalued MLPs on the market today.

Do any of these dividend monsters make our list of top dividend stocks
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see if Enterprise, Magellan, Energy Transfer, or Kinder morgan made our list, simply click here now.

Tyler Crowe owns shares of Enterprise Products Partners and Magellan Midstream Partners. You can follow him at Fool.com under the handle TMFDirtyBird, on Google+, or on Twitter @TylerCroweFool.

The Motley Fool recommends Enterprise Products Partners and Magellan Midstream Partners. 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers