Please ensure Javascript is enabled for purposes of website accessibility

Better Buy: Magellan Midstream Partners L.P. vs. Enterprise Products Partners L.P.

By Matthew DiLallo - Sep 28, 2016 at 12:00PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Two of the top MLPs go head-to-head.

Image source: Getty Images.

Investors considering MLPs Magellan Midstream Partners (MMP -0.53%) and Enterprise Products Partners (EPD 0.60%) face a tough choice. Thanks to their stable fee-based assets and investment-grade balance sheets, both companies offer pretty compelling yields, with Magellan's at 4.8% while Enterprise's is at 6.2%. However, for investors that value a growing income stream, Enterprise Products Partners is the clear better buy right now. Here's why. 

A look at the financials

As the following chart shows, both companies have a solid financial foundation consisting of exceptional credit and coverage metrics:


Credit Rating


Distribution Coverage Ratio

Enterprise Products Partners


4.2 times

1.3 times

Magellan Midstream Partners


3.1 times

1.2 times

Data source: Company investor presentations.

Both have sector-leading credit ratings thanks to their low leverage and healthy coverage ratios. That said, Magellan Midstream Partners does have a lower leverage ratio, which has consistently been below 4.0 times over the past decade. Enterprise's ratio, on the other hand, has risen from an average of 3.5 times earlier this decade to its current level north of 4.0 times due in part to two recent acquisitions. However, its leverage ratio is still comfortably below that of other MLPs, and it maintains a healthy distribution coverage ratio giving it an ample margin of safety.

Still, all things considered, Magellan Midstream Partners is a bit stronger financially due to its lower leverage.

Comparing the asset bases

With an enterprise value of $80 billion, Enterprise Products Partners is by far the larger of the two with Magellan Midstream only a quarter of its size at $20 billion. With that larger scale comes greater diversification across several commodities:

Source: Enterprise Products Partners Investor Presentation. 

While the bulk of Enterprise Products Partners' gross margin comes from its NGL pipeline and services segment, the company's assets consist of fee-based pipelines, processing plants, and export facilities across the oil and gas value chain. That focus on fees is crucial because the company's direct exposure to volatile commodity prices is less than 15% of its gross operating margin, which is a significant shift from five years ago. That enabled the company to deliver relatively stable cash flow during the current oil market downturn.

Magellan Midstream Partners, likewise, is primarily focused on fee-based assets, though refined products and crude oil pipelines and services supply most of its operating margin:

Source: Magellan Midstream Partners Investor Presentation. 

Overall, just 14% of Magellan's margin comes from commodity-related activities, which makes its cash flow about as stable as Enterprise's.

Still, while both companies have minimal direct exposure to commodity prices, Enterprise's larger scale and greater diversification give it the win in this category.

A look at the upside

Where these companies differ is in their visible upside. Enterprise Products Partners is currently undergoing a major expansion phase with $5.6 billion of projects under construction and expected to be in-service by 2018. The projects include a petrochemical facility, crude oil, refined products and NGL pipelines, and an export dock. That clearly visible pipeline of projects should enable Enterprise to extend its distribution growth streak -- which is currently up to 48 consecutive quarters -- for several years into the future.

Magellan Midstream, on the other hand, only has $1.3 billion of construction projects under way, $850 million of which are expected to be in service by the end of this year. That currently leaves it with minimal growth on the horizon in 2017 and 2018 when the bulk of Enterprise's major projects are expected to come online. While Magellan estimates that it has another $500 million in potential growth projects in the pipeline, Enterprise is also actively pursuing the development of new organic growth projects.

With a much larger and more visible growth pipeline, Enterprise Products Partners appears to have more upside potential.

Investor takeaway

While Magellan has a slightly stronger balance sheet, the much larger Enterprise Products Partners simply has more to offer investors. Not only is its current yield higher, but it has clear visibility to continue growing its payout for at least the next two years due to its healthy project backlog. That combination makes it the better buy right now in my opinion.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Enterprise Products Partners L.P. Stock Quote
Enterprise Products Partners L.P.
$26.76 (0.60%) $0.16
Magellan Midstream Partners, L.P. Stock Quote
Magellan Midstream Partners, L.P.
$48.51 (-0.53%) $0.26

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/21/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.