Natural gas pipeline giant Energy Transfer Partners (ETP) is popular with investors due to its generous investor distributions and enormous growth potential. Unfortunately, those two characteristics have become its Achilles' heel in recent years. Due to weaker commodity prices, the company has not been earning enough cash flow to support its distribution fully, which has weakened its balance sheet, making it harder to finance growth projects. These reasons are why it is merging with sibling Sunoco Logistics Partners (NYSE: SXL) in a deal that will result in a distribution decrease and stronger leverage metrics.
While that deal should make the combined entity even stronger, investors still have a better option in MPLX (MPLX 0.58%). Here's why you should check out this emerging midstream company.
A rock-solid foundation
One of the rationales for the merger between Energy Transfer Partners and Sunoco Logistics Partners is to get Energy Transfer's balance sheet "into shape quicker," according to comments by Matt Ramsey, the COO of parent company Energy Transfer Equity (ET -0.23%), made during a conference call discussing the transaction. That is because the pro forma company's debt-to-EBITDA ratio will be slightly less than 5, which is a "big improvement" according to Energy Transfer CFO Tom Long. Further, the plan is to get that metric below 4 over the next 12 to 18 months.
Contrast this with MPLX, which already sports a debt-to-EBITDA ratio of 3.5, among the lowest in the MLP space. That low leverage gives the company better access to capital, which makes it cheaper to finance growth projects.
Plenty left in the pipeline
Speaking of growth, Energy Transfer Partners and Sunoco Logistics are currently nearing the end of a massive infrastructure build-out. The companies and their various partners had more than $15 billion worth of projects in development, most of which should be complete by the end of next year. These projects support the combined entity's ability to achieve double-digit distribution growth over the near term, albeit from Sunoco's lower rate.
MPLX has a similar growth forecast, with management expecting to grow the payout by 12% to 15% next year and deliver double-digit growth in 2018. Fueling that growth are several near-term capital projects expected to go into service over the next year, as well as a myriad of drop-down transactions with parent company Marathon Petroleum (MPC 1.02%). In fact, the refining giant expects to offer MPLX the ability to acquire assets that currently generate $350 million in annual EBITDA by the end of next year. In addition, Marathon Petroleum intends to drop down its remaining MLP-eligible assets by the end of 2019, representing roughly $1 billion in annual EBITDA. On top of that, MPLX has a substantial organic growth opportunity set. Add it up and MPLX should have no problem delivering robust distribution growth over the next several years.
A deep-pocketed parent
Another noteworthy difference has to do with the parent companies supporting these MLPs. Energy Transfer Partners' parent company, Energy Transfer Equity, is a general partner whose primary source of income is the incentive distribution rights it collects from its MLP. Meanwhile, MPLX's parent, Marathon Petroleum, is a refiner that primarily makes money refining oil and marketing petroleum products via its Speedway subsidiary. These assets diversify its cash flows so that it is not primarily reliant on its MLP.
Another important distinction is that Marathon Petroleum has a much-stronger balance sheet. The company has a solid investment-grade credit rating, backed by a low leverage ratio, with debt just 1.8 times EBITDA. Contrast this with Energy Transfer Equity's junk-rated credit, which was of such concern earlier this year that the company needed to find a backdoor out of a merger to avoid taking on any more debt due to fears that the incremental leverage would be its undoing.
Because Marathon has a diversified income stream and a better balance sheet, it is in a stronger position to support the growth of its MLP instead of focusing on growing the fee stream from its MLP.
While Energy Transfer Partners controls a premier energy infrastructure franchise, the company has some issues that have hampered its ability to grow investor distributions in the past. MPLX, on the other hand, has avoided these problems because it has taken a more conservative financial approach. That stronger foundation, along with plenty of upside, is why investors should take a closer look at this up-and-coming midstream company.