Enterprise Products Partners (EPD 1.28%), Magellan Midstream Partners (MMP +0.00%), and Kinder Morgan (KMI 0.85%) all hit price highs back in 2014 or so. Since that point, it has been tough to own them. But recently they have started to bounce higher amid increasing oil prices and higher demand for carbon fuels. Here's why this trio is in recovery mode, and why the upturn could keep going.
The core of the business
Enterprise, Magellan, and Kinder Morgan are all very similar in one important way: They are each focused on the midstream business. Essentially, they own collections of pipeline, storage, transportation, and processing assets that help to move oil and natural gas from where it is drilled to where it eventually gets consumed. The midstream business is largely fee-based, with this trio getting paid for the use of the assets they own. That means the price of the commodities flowing through their systems is less important than the demand for those products.
Image source: Getty Images.
The current geopolitical tensions have shifted the story around carbon fuels in a very important way. Yes, clean energy investment will grow in the years ahead, displacing carbon fuels. However, carbon fuels remain vitally important to the world order, and will likely remain so for decades to come. And more to the point, having a reliable source of oil and natural gas is clearly something that every country needs to consider. U.S.-based Enterprise, Magellan, and Kinder Morgan help to move oil within a politically stable region that is also one of the world's largest energy markets.
That's one big reason this trio has seen an uptick in investor demand, and why that increased interest is likely to linger. Well, that and the huge yields. Enterprise's distribution yield is a generous 7.1%, Magellan's is 8.3%, and Kinder Morgan's dividend yield is 5.6%. Before making any calls here, though, there's a bit of background on each name you need to know.
Long records, slightly different focus
Enterprise and Magellan, which are both master limited partnerships, have each increased their distributions for around two decades. That's pretty impressive, and includes annual hikes in 2020 despite the deep oil price downturn that was driven by a demand decline during the early days of the pandemic. That said, there's an important difference between these two names.
NYSE: EPD
Key Data Points
Enterprise is one of the most diversified midstream companies around, with a huge portfolio of assets. It has been leaning toward natural gas, which is viewed as a transition fuel in the world's efforts to go green. Magellan, meanwhile, is basically 100% focused on oil and refined products like gasoline and jet fuel (basically what oil gets turned into). So they are kind of at two different sides of the carbon fuel space.
NYSE: MMP
Key Data Points
That said, Magellan's distributable cash flows cover its distribution by around 1.2 times versus Enterprise's roughly 1.7 times. Diversification and that extra distribution cushion are reasons more-conservative types might favor Enterprise.
A cut and back to growth
At the other end of the spectrum here is Kinder Morgan, which cut its dividend in 2016 after promising to increase it. That will likely cause a bit of a trust issue for many investors, and instantly pull it out of contention here. That's totally understandable, but the company has been working hard to rebuild trust with investors. That has included getting back to dividend growth, with hikes each year since 2017.
NYSE: KMI
Key Data Points
Like Enterprise, Kinder Morgan is large and diversified. It also has a hefty dividend coverage ratio of around 1.7 times. The lower dividend yield here at least partly reflects the fact that the dividend is, despite the return to annual increases, still below the levels before the cut. And Kinder Morgan is not a partnership, which reduces the tax complication materially (there's no K-1 to worry about come tax time) and means more institutional buyers can own it. If you are the forgiving type, Kinder Morgan's dividend cut has vastly improved the safety of the payout.
Plenty of time
At the end of the day, the big story for Enterprise, Magellan, and Kinder Morgan is that investors have a renewed appreciation for the importance of carbon fuels. And this trio provides vital services to the energy sector, but isn't nearly as exposed to commodity volatility as a driller would be. If you are a yield-focused investor, there's still time for you to get high yields here as the consistency of these businesses entices investors back into the midstream space.
