Buckeye Partners (BPL +0.00%) and Kinder Morgan (KMI +0.72%) are among the many energy midstream companies to experience the fallout of the oil market crash. Both companies have had to take drastic action to shore up their financial situation -- including cutting their high-yielding dividends -- so that they can fund expansion projects.
However, one key difference between these two companies is that Kinder Morgan is way ahead of Buckeye Partners on its turnaround plan. That's one of the many factors that make it a better buy right now.
Image source: Getty Images.
A look at their financial profile
Kinder Morgan and Buckeye Partners have undertaken a series of strategic moves to bolster their balance sheets in recent years. Here's how these two midstream companies currently stack up:
|
Company |
Dividend Yield |
Credit Rating |
Debt to Adjusted EBITDA |
Projected 2019 Dividend Coverage Ratio |
% of Cash Flow, Fee-Based or Regulated |
|---|---|---|---|---|---|
|
Buckeye Partners |
10.3% |
BBB-/Baa3 |
4.5 times |
1.35 times |
98% |
|
Kinder Morgan |
6% |
BBB-/Baa3 |
4.6 times |
2.05 times |
91% |
Data source: Buckeye Partners and Kinder Morgan. Dividend yield assumes 25% increase for Kinder Morgan in 2019.
At first glance, both companies appear to have fairly similar financial profiles. However, there's a lot more to the story.
Buckeye Partners recently announced a series of moves to bolster its financial position. The pipeline and terminal master limited partnership slashed its distribution to investors by 40% while signing agreements to sell $1.425 billion in assets. Those moves improved the company's distribution coverage ratio from a tight 1.0 times up to a more comfortable 1.35 times while also enhancing its leverage ratio and liquidity. It will also give the company the funds to build some of the major expansion projects it has underway.
Kinder Morgan, for its part, has sold a series of assets in recent years, including its controversial Trans Mountain Pipeline in Canada, which has significantly improved its balance sheet. Those moves have the company in line for a credit rating upgrade, while Buckeye Partners' strategic initiatives have only stabilized its credit rating, which sits one notch above junk.
In the meantime, Kinder Morgan might have a lower dividend yield, but that's because the company pays out less of its cash flow. Because of that, its payout is on rock-solid ground and on pace to continue growing in the coming years while there's a real risk that Buckeye might need to cut its payout again.
Checking out what's coming down the pipeline
One of the reasons both companies needed to fortify their finances is so that they could fund expansion projects. Kinder Morgan currently has $6.5 billion of expansions in progress, which position the company to grow its cash flow by 10% in 2019. The company is funding nearly all of its capital spending with cash flow, which will further improve its finances as those projects start generating cash in the future.
Meanwhile, Buckeye Partners aims to be more like Kinder Morgan, which is why it slashed its payout and sold assets. Those moves should give the company the cash it needs to fund its current slate of expansions. However, the sales will negatively impact earnings and cash flow in the near term until the company's expansion projects come online toward the end of 2019. As a result, Buckeye is heading in reverse just as Kinder Morgan is accelerating.
Image source: Getty Images.
Comparing their valuations
The turbulence in the oil market has put pressure on the market values of both companies in recent years. Consequently, both trade at cheap prices. Kinder Morgan, for example, currently sells for 7.6 times its anticipated cash flow for 2019 while Buckeye Partners trades at about 8.1 times distributable cash flow. Both are well below their peer group average of around 11 times cash flow.
Buckeye's low valuation makes sense given that the company is still trying to get back on solid ground and its earnings are about to take a step back. Kinder Morgan's bottom-of-the-barrel valuation, on the other hand, doesn't make much sense considering that it has already firmed up its foundation and is on pace to grow cash flow quickly in the coming year.
All signs point to Kinder Morgan
While Buckeye Partners and Kinder Morgan have similar financial profiles and valuations, Kinder Morgan is well ahead of Buckeye at the moment since it has already returned to growth mode. Because of that, and the fact that its other metrics are slightly better than Buckeye's, it's the better buy between the two right now.
