Enterprise Products Partners (EPD +0.75%) is a bellwether name in the midstream oil and natural gas sector. However, those in the know are just as cognizant of the smaller Magellan Midstream Partners (MMP +0.00%) and the long-term success it has achieved. The problem is that the future for the industry could be very different from the past, and one of these two partnerships is simply better positioned in what is a very uncertain time. Here's a closer look at this pair to help you understand why.
1. Size and scale
Enterprise Products Partners has a market cap of roughly $43 billion. Its assets span across the pipeline, storage, processing, and transportation sectors of the North American midstream energy industry, and it is easily one of the largest and most diversified names in the space. It would be virtually impossible to replicate the business it has created.
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Magellan Midstream Partners has a market cap of around $10 billion. Its business is focused on the pipeline (with a focus on refined products) and storage areas. It is an important industry participant, but it just doesn't have the same scale as Enterprise. To put a number on that, Magellan's nearly-10,000 miles of pipelines pale in comparison to Enterprise's 50,000 miles. The two partnerships just aren't in the same league.
2. Financial strength
That said, Magellan has a long history of taking a conservative approach with its balance sheet. Its financial debt to EBITDA ratio of around 3.4 times sits at the low end of the industry, which is the norm. It's also lower than the roughly 3.7 times financial debt to EBITDA ratio that Enterprise currently sports. However, the difference here really isn't that dramatic -- Enterprise's leverage is also toward the low end of the industry, and that's usually where Enterprise sits as well. Basically, Magellan is probably the more fiscally conservative name here, but when you look at the big picture both of these master limited partnerships (MLP) are pretty prudent with their balance sheets.
3. Industry headwinds
Having a strong financial foundation is important right now because the energy sector is in a state of flux today. Thanks to the economic shutdowns being used to slow the spread of the coronavirus, demand for oil, natural gas, and the products they get turned into has been weak. Enterprise's revenue was off by 13% year-over-year in the third quarter of 2020, while Magellan's top line declined 9% or so. That's not terrible when you compare it to the damage seen in the upstream segment of the oil industry, but it isn't exactly good, either. And there are important implications.
4. Distributions
Both Magellan and Enterprise should cover their distribution payments in 2020 without much of a problem, but there's a big difference in their coverage ratios. Magellan is projecting distribution coverage of roughly 1.1 times, while Enterprise's coverage was roughly 1.6 times through the first nine months of 2020, and will probably be in that same area when the year is finally over. This means that Enterprise has a lot more leeway when it comes to dealing with further adversity than Magellan.
5. Growth plans
There's also a notable difference here when it comes to the future. Historically, growth has been driven by building new pipelines or acquiring existing assets. Right now Magellan has minimal investment plans for 2021, totaling less than $100 million (for comparison, the partnership spent $1 billion in 2019 and projects around $400 million in 2020). Enterprise, meanwhile, has $3.9 billion worth of projects under way or just recently put in service that should support growth through 2023. Enterprise is in a better position here.
As for acquisitions, Magellan has a slightly stronger balance sheet, which could help. But its size is a constraining factor, since it isn't likely to take on huge deals and has a relatively narrow focus. Enterprise, on the other hand, could more easily handle a big purchase based on its size and scale. If acquisition-led growth becomes a more important factor, Enterprise is easily the better positioned company.
The winner?
At the end of the day, most investors will probably be better off with Enterprise Products Partners. Its yield of around 9% is slightly lower than the 9.6% yield you would get from purchasing Magellan, but Enterprise just looks better positioned than its smaller peer. Both are well-run midstream players, but given that the headwinds these partnerships face aren't over yet, sticking with the strongest of the strong is the prudent call.
