There's gold in them thar...pipes! Black gold, that is, along with gas and refined products, crisscrossing the nation. And many of the companies operating those pipelines offer generous rewards to investors in the form of big yields and the prospect for growth as the U.S. oil and gas industry continues to set production records.
Two companies in this industry include Buckeye Partners (NYSE:BPL), a master limited partnership (MLP) that operates a refined fuel pipeline network and many terminals across the U.S., and Kinder Morgan (NYSE:KMI), the largest natural gas pipeline operator in the country. Let's dig a little deeper to see which one looks like the better buy.
Better balance sheet
Both Kinder Morgan and Buckeye Partners had to cut their payouts to investors recently: Kinder slashed its dividend back in 2016, while Buckeye reduced its distribution in 2018. These moves were expected to shore up the companies' balance sheets and help redeploy cash to debt repayment. Currently, Kinder yields about 4.2%, with big increases promised this year and next. Buckeye's yield is higher at about 9%, but it hasn't announced any plans for an increase.
Kinder Morgan has indeed made progress on paying down debt since its dividend cut. Total long-term debt for the company reached a high of more than $45 billion in 2015 but has since dropped to $37.6 billion. To put that in relative terms, at its peak, Kinder Morgan's debt was more than 9.0 times EBITDA on a trailing 12-month basis; today it's at about 6.1 times EBITDA. That's still high -- even for a sector notorious for carrying heavy debt loads.
However, Kinder Morgan is planning to reduce its debt even further. In 2018, it sold its major Trans Mountain Pipeline project to the Canadian government and expects to use the proceeds to pay down debt. In fact, on its third-quarter 2018 earnings call, CEO Steve Kean announced the company is targeting a debt load of 4.5 times EBITDA. In December, ratings agency Moody's upgraded Kinder Morgan's debt rating from Baa3 to Baa2, a sign of confidence that the company is getting its debt under control.
Buckeye Partners, on the other hand, is stuck at a Baa3 rating from Moody's, the lowest investment-grade rating. Maintaining that investment-grade rating was, according to CEO Clark Smith, what prompted the distribution cut. But Buckeye's rating could also improve now that the company has sold its own package of assets totaling about $1.4 billion and expects to use that to pay down some of its $4.9 billion in long-term debt.
So both companies have had balance sheet troubles but are working to move past them. The big question is, which company has the better prospects for growth?
Hot or not?
Both Kinder Morgan and Buckeye are making a major bet on growth in the red-hot Permian Basin of West Texas. Thanks to the recent explosion of oil and gas production in the Permian, coupled with a lack of existing infrastructure in the region, there's big opportunity for companies that can build long-haul pipelines to connect Permian wells to refineries and shipping terminals on the Gulf Coast.
Kinder Morgan is currently building two such pipelines, the Gulf Coast Express (GCX) to Corpus Christi and the Permian Highway Pipeline to Houston. Both pipelines are fully subscribed -- customers have reserved all the space available in the pipe -- and boast major customers that include Apache Corporation and ExxonMobil subsidiary XTO Energy. When the projects are complete, Kinder will have a 50% ownership stake in each pipeline. Both pipelines will ship about 2 billion cubic feet of natural gas per day. Kinder expects GCX to be completed by the end of October, while the Permian Highway Pipeline will be complete in 2020.
Meanwhile, Buckeye isn't investing in any long-haul pipelines (which makes sense, as its existing pipeline network ships refined products as opposed to crude or natural gas). Instead, Buckeye is partnering with fellow MLP Phillips 66 Partners and Marathon Petroleum to construct a new marine terminal in Corpus Christi that will act as the terminal for the Grey Oak crude pipeline from the Permian.
Buckeye is hoping that improvements to the Port of Corpus Christi combined with long-haul pipelines to the area (like Kinder's) will help it lock in customers for the new project to finance lucrative expansions to the site. According to Smith, Buckeye is "exploring additional connectivity" with third-party pipeline operators.
The driver's seat
Although the Permian Basin features prominently in both companies' growth strategies, Kinder Morgan's is likelier to pay off for the company. Here's why.
Right now, Kinder Morgan is sitting in the driver's seat for its Permian expansion plans. With its pipelines fully subscribed, all it has to do is build them and then start collecting cash from its customers, who are already locked into the project.
Buckeye has one pipeline locked in to supply its new terminal, which will supply between 700,000 and 1 million barrels of crude per day. That's good, but Buckeye hopes to eventually enlarge the facility from 3.4 million barrels of storage to 10 million barrels. So it will need to cut deals with other third-party pipeline operators to make that happen. Meanwhile, at least eight other companies are constructing or upgrading Gulf Coast marine terminals to handle an influx of Permian crude. That competition may hurt Buckeye. Not to mention, if the Port of Corpus Christi decides not to make the proposed improvements after all, Buckeye may get stuck with a facility with limited capacity.
Finally, Kinder Morgan's larger size (it's more than seven times larger than Buckeye by market cap) and bigger backlog of projects means that it isn't going to be quite as dependent on its Permian strategy as Buckeye is. And if, for some reason, that strategy doesn't pay off because of production problems or export issues, Kinder has other growth opportunities to fall back on.
And the winner is...
It isn't a runaway win, but Kinder Morgan looks like a better buy right now than Buckeye Partners. Although both companies offer healthy payouts to investors, are paying down debt, and are investing in the Permian Basin boom, Kinder Morgan's Permian strategy seems like a surer bet than Buckeye's.
Kinder Morgan is an excellent pick for investors interested in buying into the midstream energy infrastructure space right now.