Midstream oil and natural gas partnerships Magellan Midstream Partners, L.P. (NYSE:MMP) and Enterprise Products Partners LP (NYSE:EPD) have a lot in common. However, they differ in a few important ways that income investors in particular will find very interesting. Which one you prefer will likely boil down to whether you are looking for income for today or income for tomorrow.
Fee-based and stable
Magellan and Enterprise both own the pipes and facilities that help get oil and natural gas from where they are found to where they get processed and, finally, to end customers. Generally speaking, they get paid for the use of their assets, just like tolls on a highway. For these partnerships the price of energy is less important than demand for oil and natural gas, which tends to remain robust even when prices are weak.
Although the foundations of their businesses are similar, $55 billion market cap Enterprise is a much larger company than $16 billion market cap Magellan. That's an important difference. One place it shows up is in this pair's spending plans: Enterprise has roughly $9 billion in growth projects in the works, and Magellan has about $1 billion. Enterprise's larger size means it has to spend much more to keep growing its business.
That's not good or bad, but it does mean that the growth projects Enterprise undertakes have to meet a certain scale hurdle. Tiny investments just won't do enough to move the needle. Magellan, on the other hand, can look at deals that wouldn't even be on the radar at Enterprise. Essentially, the law of large numbers means it will be easier for Magellan to grow over time.
Yield and growth
This fact shows up in each partnership's distribution growth. Enterprise has a long history (20 years and counting) of upping its distribution every year, generally at around 5% a year. That bests the historical rate of inflation growth by two percentage points, so it's not bad. But it's roughly half the 11% annualized rate at which Magellan has grown its distribution over the past decade. Magellan has increased its distribution annually for 17 consecutive years, by the way.
The distribution growth difference shows up in the yield as well. Enterprise offers a roughly 6.5% yield while Magellan's yield is lower at 5%. Clearly, investors are paying more for the higher growth option here. If you are looking to maximize current income then Enterprise is the easy winner. But if you prefer distribution growth, maximizing the growth of your purchasing power over time, then Magellan should be your choice.
Still, there's more going on here than just size. Magellan is also a more conservatively run partnership when it comes to leverage. As the chart above shows, debt to EBITDA at Magellan has historically been lower than the same figure at Enterprise. Less leverage means that more cash can flow through to unitholders. That's an important part of the distribution growth story too.
Not an easy call
At the end of the day, both Enterprise and Magellan are well run partnerships, and both appear to have bright futures. Either would be fine for even the most conservative of investors. However, the one you pick will likely boil down to the balance between distribution yield and distribution growth. If you are looking to maximize your income today you'll want to look at Enterprise. That said, if you are in the market for distribution growth, then Magellan is the better call.