Enterprise Products Partners (EPD 1.26%) has been one of the most reliable income investments in the energy sector. The master limited partnership (MLP) has increased its distribution for 27 consecutive years (every year since becoming a publicly traded company). It currently offers investors a yield of nearly 7%.
Fellow MLP Delek Logistics Partners (DKL 2.14%) has also been very reliable over the years. It recently delivered its 50th consecutive quarterly distribution increase (12 and a half years). With its yield of over 10%, it's also an attractive option for income-seeking investors.
Here's a look at which energy stock is the better option for investors seeking a safe and reliable stream of passive income, and who are comfortable receiving the Schedule K-1 federal tax form that MLPs send to their investors each year.
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A sector leader
Enterprise Products Partners operates one of the largest energy midstream platforms in the country. The company owns over 50,000 miles of pipelines that transport crude oil, natural gas, natural gas liquids, petrochemicals, and refined products. The fully integrated company also operates storage terminals, export docks, processing plants, and petrochemical manufacturing facilities. These assets generate stable and predictable earnings, primarily backed by long-term, fee-based contracts and government-regulated rate structures.
The MLP generates enough cash to cover its lucrative distribution by a comfortable 1.6 times. That enables it to retain significant excess free cash flow to fund organic growth projects and return additional cash to investors via unit repurchases. Enterprise Products Partners has one of the strongest financial profiles in the midstream sector. It has an A credit rating and a low 3.1 times leverage ratio. That gives it ample financial capacity to invest in growing its business while returning cash to investors.
Enterprise Products Partners currently has $6 billion of organic growth projects on track to enter commercial service in the second half of this year. It also plans to spend between $2.2 billion and $2.5 billion on growth capital projects next year. These expansions should drive its cash flow higher through at least 2027. The company's growing free cash flow will allow it to continue returning more money to investors via distribution increases and unit repurchases.
The MLP also uses its financial flexibility to make strategic acquisitions. It recently bought a gas gathering business from Occidental Petroleum. That deal will provide a near-term cash-flow boost from the acquired assets and future growth from a recently approved gas processing plant. Deals like that enhance its ability to continue increasing its distribution.
Steadily gaining its independence
Delek Logistics Partners is an MLP formed by refining company Delek US Holdings in 2012 to own and operate crude oil and refined products logistics assets. The energy company has steadily diversified its business by acquiring other midstream assets. It's now a full-suite midstream services provider in the Permian Basin with natural gas, crude oil, and water assets. The company's moves to diversify its operations have reduced its reliance on Delek US Holdings, which supplied 58% of its EBITDA in 2023, to an estimated 30% this year. That has helped lower its risk profile.
The MLP's diversification strategy has also enhanced its growth prospects. Instead of relying on drop-down asset acquisition transactions with its parent to fuel growth, it's now investing in higher-return organic expansion projects to support third-party customers. For example, the company recently completed its new Libby 2 gas processing plant, providing much-needed additional processing capacity to its producing customers in the region it serves. The company also recently completed construction on some crude oil and water gathering projects.
Additionally, it has been making bolt-on acquisitions to enhance its scale and commitment to being a full suite services provider. Delek Logistics Partners began the year by closing its $285 million deal for Gravity Water. Meanwhile, it closed its $230 million H2O Midstream acquisition last fall.
Delek Logistics supports its growing operations and distribution with a decent financial profile. The MLP ended the second quarter with a 4.3x leverage ratio and expects to produce enough cash to cover its distribution by over 1.3 times this year. While those metrics provide the company with the financial flexibility to continue growing, they're much weaker than those of Enterprise Products Partners. That's evident in Delek's credit rating, which is below investment grade. As a result, it has much higher borrowing costs. For example, Delek recently issued $700 million of notes due in 2033 at a rate of 7.375%. Meanwhile, Enterprise Products Partners recently issued $2 billion of notes with maturities ranging from 2028 to 2036 at rates between 4.3% and 5.2%.
Enterprise Products Partners is the better energy stock to buy for passive income
Enterprise Products Partners and Delek Logistics Partners have consistently generated reliable income over the years. However, Enterprise is a much safer investment. It has a much larger scale and more diversified asset base backed by a stronger financial profile. Because of that, it's the better energy stock to buy for those seeking a super-safe income stream.
