In the domestic midstream energy sector, two names stand out for their size and scale: Kinder Morgan (NYSE:KMI) and Enterprise Products Partners (NYSE:EPD). The two have fallen along with the broader energy sector this year. But investors looking at the energy sector for opportunities should strongly consider a midstream player -- and as two of the largest and best-known names in that space, Kinder Morgan and Enterprise are good starting points. Here's a quick look at how they match up.
1. Size and business makeup
Kinder Morgan's market cap is roughly $34 billion, while Enterprise weighs in at around $37 billion. So they are both pretty big entities. However, the real issue here isn't the value that Wall Street places on these midstream players, it's the actual scope of their operations.
Kinder Morgan owns 83,000 miles worth of pipelines, handling oil, natural gas, and the products they get turned into. It also operates 147 terminals that offer storage and other transportation-oriented services. Enterprise has roughly 49,000 miles of pipelines and four import/export terminals, but it also has material storage capabilities and 49 processing plants (for natural gas and oil). It is every bit as large as Kinder, but has a more diversified footprint of assets.
Neither portfolio would be easily replaced, and both provide vital services to the larger energy sector. That said, Enterprise probably has a slight edge here because its business reaches into more areas of the market, allowing it to benefit over the long-term from the broader diversification of its assets.
2. Corporate structure
One of the more prominent differences between Kinder Morgan and Enterprise is that Enterprise is structured as a master limited partnership (MLP). Simplifying things a great deal, it treats unitholders as if they were partners in the business, allowing them to benefit from tax advantages (like depreciation, which shields income from taxation) that would normally not be available to owners of a more traditionally structured public company like Kinder Morgan. However, there are tax complications that come with the MLP structure, including the K-1 form that has to be dealt with come April 15. Moreover, MLPs aren't generally appropriate for tax-advantaged retirement accounts. If you are going to own an MLP, you should talk to a tax professional. Kinder Morgan avoids all of that complication, and thus wins hands down for those who like to keep things simple.
Enterprise Products Partners offers investors a huge 10% distribution yield. Kinder Morgan's yield is roughly 6.5%. There are a lot of caveats here to consider, though. For example, Kinder Morgan has stated a goal of increasing its dividend by 25% in 2020. Despite the broad economic impact of COVID-19, it has yet to back down from its planned dividend hike. Assuming that dividend increase takes place (upping the payment from $1.00 per share per year to $1.25), the yield would be roughly 8.3% based on the current stock price. So the disparity between yields isn't quite as large as it seems at first. Any distribution increases this year at Enterprise is likely to be in the low-to-mid single digits, at best, which is the historical norm.
That said, Enterprise has increased its distribution annually for more than two decades; Kinder Morgan is working back from a dividend cut in 2016. While its dividend has increased rapidly over the past couple of years, it still isn't back to where it was prior to the cut. Worse, Kinder Morgan was calling for an increase in 2016 just a couple of months before it announced that it was instead trimming the payout to save cash. There's a trust issue that conservative dividend investors should strongly consider here.
To be fair, Kinder Morgan has done a good job of living up to its word since the cut, which should count for something. But Enterprise's distribution history is much stronger, even if its distribution growth potential isn't as good right now. Note that Enterprise's higher yield helps make up for the dividend growth issue to some degree, since Kinder Morgan's dividend growth after 2020 has yet to be discussed in any detail. Dividend growth is unlikely to continue at a 25% clip.
As for dividend coverage, Kinder Morgan easily comes out on top. Distributable cash flow covered its disbursement by over two times in 2019. Enterprise's distribution coverage was roughly 1.7 times, which is still very strong. That said, based on Kinder Morgan's 2020 projections, including the planned dividend increase, coverage would fall to around 1.8 times. So these midstream players are in roughly similar places when it comes to covering their distributions.
This is a tough call, but erring on the side of caution, Enterprise's consistency pushed it ahead here.
One of the big reasons why Kinder Morgan was forced to trim its dividend in 2016 was that it has historically made greater use of leverage than many of its peers. During a difficult time for the energy industry, it was forced to choose between using cash to pay dividends, and cutting the dividend to invest the freed-up cash in its business. It chose its business, which was the right call, though the dividend decision was a hard pill to swallow for investors who were counting on the dividend to help cover living expenses.
At this point, however, Kinder Morgan has made notable strides in reducing its leverage. Financial debt to EBITDA has fallen from over 9 times in 2016 to roughly 4.9 times at the end of 2019. But that's still higher than Enterprise, which comes in at around 3.5 times. It would be hard to say that Kinder Morgan's balance sheet is in troubling shape today, but Enterprise still has a much longer history of operating in a fiscally conservative manner.
Kinder Morgan gets kudos for reducing leverage, but Enterprise still gets the win here.
5. Today's energy market
Oil and natural gas prices are painfully low today for a variety of reasons, including the global impact of growing U.S. production, the economic slowdown from COVID-19, and tensions between major energy-producing countries. At this point, there's a lot of energy sitting in storage that will have to be worked off before oil and gas prices are likely to rise. And that can't begin to happen until after the economic hit from COVID-19 has begun to fade. So Kinder Morgan and Enterprise are facing hard days ahead. Both work with high-quality customers and have material fee-based businesses. So each enters this period, operationally, in reasonably strong shape to handle the turbulence. The biggest impact is likely to be in the future, as their customers pull back on growth plans.
Enterprise has come out and stated that it will be reevaluating its growth plans. Basically, the market environment is likely to lead it to trim capital spending. Kinder Morgan has yet to make a similar announcement, but in early March, before COVID-19's impact started to become more clear, it stated that it had $3.6 billion in projects in the works. Although that sounds more promising than Enterprise's mid-to-late March update, Kinder Morgan may end up walking back its plans as COVID-19's impact has become more dramatic. Still, at this point, Kinder Morgan appears to have an edge here.
A tough call
Kinder Morgan and Enterprise Products Partners are both well-run midstream giants. They are facing a tough energy market today, though both are likely to survive without too much difficulty.
What growth looks like from here is more uncertain. When all is said and done, investors are probably better off erring on the side of caution and going with Enterprise. With so many close calls above and Kinder Morgan's 2016 dividend cut, it's likely better to stick with a name that has proven it can be trusted rather than one that's still trying to win back investor trust.