Enterprise Products Partners (EPD -0.17%) is the gold standard for income-focused investors in the energy midstream space. The master limited partnership (MLP) has increased its distribution 74 times since its initial public offering in 1998.
This year marks the 24th year it has increased its payout. That makes it stand out in a sector where many other MLPs have had to slash their distributions during periods of commodity price volatility.
While Delek Logistics Partners (DKL 1.67%) isn't in Enterprise Products' class yet, it's slowly getting there. The MLP has increased its distribution every quarter since 2012, giving it 39 straight quarters of distribution growth. With its latest raise, it now yields 8.7%.
Here's a look at whether Delek Logistics Partners has what it takes to become the next Enterprise Products Partners and deliver reliable distribution growth for the next decade and a half.
What fueled Enterprise Products Partners' successful track record?
One of the keys to Enterprise Products Partners' success is its conservative approach. The MLP routinely has one of the highest credit ratings in the midstream space.
That's due, in part, to its low leverage ratio. Enterprise Products Partners' debt-to-EBITDA (earnings before interest, taxes, depreciation and amortization) ratio currently stands at 3.1 times, which is below its 3.25-3.5 times target. That gives it the flexibility to capitalize on growth opportunities as they emerge.
The company also generates steady cash flow. It has diversified operations, including pipelines, processing facilities, storage complexes, export terminals, and petrochemical plants. Those assets primarily generate stable fees backed by long-term contracts or government-regulated rate structures.
Meanwhile, Enterprise Products Partners pays out a conservative portion of its cash flow via its distribution, which yields over 8%. The MLP's coverage ratio stood at 1.9 times at the end of the third quarter. That gives the company a significant cushion, while allowing it to retain earnings to fund growth-related investments.
The company has balanced growth over the years by making targeted strategic acquisitions and investing in organic-growth projects. For example, it paid $3.25 billion earlier this year to acquire Navitas Midstream, to gain a foothold in the fast-growing Permian Basin.
The company also has $5.5 billion of organic expansion projects underway, including additional natural gas processing plants, export capacity, pipelines, and petrochemical plants that should grow its cash flow over the next several years. Its diversified approach provides it with more opportunities to expand, which has helped give it the fuel to steadily increase its distribution.
A look at whether Delek Logistics can mirror that success
Refining-company Delek US Holdings (DK 3.24%) formed Delek Logistics Partners in 2012 to own, operate, acquire and build oil and refined products logistics assets. Delek US Holdings has steadily dropped down its logistics assets to its MLP. Those transactions have grown the partnership's earnings, allowing it to steadily increase the distribution.
In addition, Delek Logistics has completed third-party acquisitions and organic-expansion projects. The company recently completed a sizable third-party purchase, buying 3Bear Energy for $628 million to enhance its midstream position in the Permian Basin.
Delek US Holdings still has some legacy logistics assets it could drop down to its MLP in the future, providing some visible growth potential. Meanwhile, the company has some small organic-growth projects in the pipeline.
The MLP has a solid financial profile to fund growth. It ended the third quarter with a comfortable 1.6 times distribution-coverage ratio, while leverage was 4.35 times debt-to-EBITDA after closing the 3Bear deal. Even though those metrics aren't as strong as Enterprise Products', they give Delek plenty of flexibility to continue making acquisitions when the right opportunities arise. Those deals could give it the fuel to continue growing the distribution.
However, one of the big differences between Enterprise Products and Delek Logistics is that the former is an independent company, while the latter has been dependent on its parent to drive growth. Even though Delek Logistics has started making third-party acquisitions, it doesn't have a lot of organic expansions, which tend to generate higher returns.
Because of that, the company could run out of fuel to grow its distribution in the future if it can't find accretive deals. If that were to happen, Delek US Holdings could opt to acquire its MLP, which is the route many of its peers have taken as their midstream affiliates started running low on fuel.
A good dividend-growth stock, but no Enterprise Products Partners
Delek Logistics Partners has a solid track record of growing its high-yielding distribution. That upward trend will likely continue in the near term since it has a solid financial profile to continue funding acquisitions.
However, the company could eventually run out of fuel since it relies on drop-down acquisitions from its parent to finance its growth. Because of that, it probably won't turn into the next Enterprise Products Partners with a multidecade-distribution growth streak. Investors seeking sustainable income growth should stick to the gold standard.
