Kinder Morgan (NYSE:KMI) and Plains All American Pipeline (NYSE:PAA) have been terrible investments over the past three years, with both having lost more than half of their value over that time frame. Fueling that ferocious sell-off has been the carnage of one of the worst oil market downturns in decades, which has had a negative impact on both companies.

That said, while their abysmal stock performances suggest that earnings plunged, that hasn't been the case. Kinder Morgan's distributable cash flow, for example, is only expected to be about 4% below its 2015 peak next year. Meanwhile, Plains All American Pipeline's earnings are only about 9% below 2013's pinnacle. Because of that, both stocks trade for dirt-cheap valuations these days. However, one is still quite a bit cheaper than the other, which, when combined with other factors, makes it the better buy between the two.

An oil pump with stacks of $100 bills in the back ground.

Image source: Getty Images.

Drilling down into their financial situations

The primary reason both pipeline stocks shed half of their values in the last three years was due to concerns about their weaker financial profiles as industry conditions deteriorated. Both needed money to finance expansion, which was getting harder to find given their bloated balance sheets and razor-thin margin for error. Because of that, both companies took dramatic actions to firm up their foundations in recent years, including slashing their payouts and selling assets to reduce debt.

Those moves put them on firmer ground:

Company

Credit Rating

Debt-to-Adjusted EBITDA

Projected 2018 Dividend Coverage Ratio

% of Cash Flow Fee-Based or Regulated

Plains All American Pipeline

BBB/BBB-/Baa3

4.8 times

1.6 times

90%

Kinder Morgan

BBB-/Baa3

5.2 times

2.6 times

91%

Data sources: Kinder Morgan and Plains All American Pipeline Partners.

Kinder Morgan, for example, has reduced its debt by $5.9 billion since the end of 2015, which pushed its leverage ratio from a concerning 5.8 times closer to its target of less than 5.0 times. Meanwhile, Plains All American Pipeline is in the process of reducing debt from the $11.2 billion it had earlier this year to $9.7 billion by early 2019, which would get leverage within its 3.5 to 4.0 times target range.

Because of that, both companies can much more comfortably cover their reset payouts. In fact, Kinder Morgan is in such a good spot right now that it expects to boost its dividend 60% next year, implying a 4.5% yield. Meanwhile, Plains All American can more comfortably cover its 6%-yielding distribution going forward.

A close-up of a gas pipeline under construction.

Image source: Getty Images.

A look at what's ahead

In addition to those lucrative dividends, both companies are on pace to grow earnings and cash flow in the coming years. Kinder Morgan, for example, expects distributable cash flow (DCF) to rise 3% next year. In addition to that, it has $10.2 billion of long-term, fee-based projects either under construction or in development, which should add $1.5 billion of incremental EBITDA over the next five years, representing a 19.5% improvement from this year's level. That growth influences Kinder Morgan's view that it can increase its dividend 60% next year, and by 25% in both 2019 and 2020, since it would help keep dividend coverage above 2.0 times over that timeframe.

Plains All American Pipeline, likewise, expects earnings to begin improving in the coming years. In the company's estimation, EBITDA could rise from $2.1 billion this year up to $2.7 billion in the near term, which represents an almost 30% improvement. Fueling that view is a combination of the fee-based growth projects it has under development and the potential for increased utilization of its pipeline systems as the oil market recovers. This growth could enable the company to start increasing its distribution in early 2019.

All of that for a dirt-cheap price

As mentioned earlier, both of those pipeline companies sell for much lower valuations than they did in their heyday. Kinder Morgan, for example, sells for just 9.1 times DCF, while Plains All American Pipeline trades at 10.8 times DCF, figures both well below the sector average of 14.6 times. That makes them ridiculous bargains in today's red-hot stock market.

Both look like great buys, but one is the better option right now

That said, while both are cheap relative to their peers and the market, Kinder Morgan looks like the better buy over Plains All American Pipeline at the moment. Not only is it a bit cheaper, but it has already finished its turnaround plan, which puts it on pace to return significantly more cash to investors next year. Those cash returns could provide the fuel needed to drive its valuation closer to the peer group average, which suggests it has more upside in the near term than Plains.

Matthew DiLallo owns shares of Kinder Morgan and has the following options: long January 2018 $30 calls on Kinder Morgan, short December 2017 $19 puts on Kinder Morgan, and short March 2018 $17 puts on Kinder Morgan. The Motley Fool owns shares of and recommends Kinder Morgan. The Motley Fool has a disclosure policy.