Measuring risk is quite possibly the easiest thing you can do when looking at a master limited partnership. After all, just about every measurement and metric we use for MLPs -- distribution coverage ratio, debt to EBITDA, Standard & Poor's Credit ratings -- are all related to risk, or more specifically the risk that it will lower its distribution payments. But there aren't many measurements for value when it comes to MLPs. So how do you know if you are paying a premium or a discount for them. Let's take a look at a couple ways we can measure value in a MLP and see why when we stack Energy Transfer Partners (NYSE:ETP) up against Enterprise Products Partners (NYSE:EPD), Magellan Midstream Partners (NYSE:MMP), and Kinder Morgan Energy Partners (UNKNOWN:KMP.DL), Energy Transfer comes out on top.
Valuation, it's not earnings
One of the difficult aspects of valuing a master limited partnership is that the metric that we are all so familiar with, the price to earnings ratio, is pretty much useless. In the case of MLPs, available cash is distributed to unitholders, so there are no retained earnings. Instead, let's value them on two other metrics that are a little more representative of MLPs, Total enterprise value to EBITDA and price to distributable cash flow. Total enterprise value to EBITDA measures the ability to generate income from operations when you consider both debt and equity, and price to distributable cash flow measure how much you are paying for the company to generate $1 in cash flow available to unitholders.
One thing to consider with these metrics, though, is that both Energy Transfer Partners and Kinder Morgan Energy Partners have general partners that have incentive distribution rights. So in the case of these two companies, we will look at only the distributable cash flow available to unitholders in the limiter partnership. Since Enterprise and Magellan do not have general partners, they don't need to pay out incentive distribution rights and we don't need to worry about this.
|Company||Total Enterprise Value to EBITDA (LTM)||Distributable Cash Flow Available to Limited Partners (LTM, in millions)||Price to Distributable Cash Flow (LTM)|
|Enterprise Products Partners||18.3x||$3,922||18.3x|
|Energy Transfer Partners||16.6x||$1,882||9.6x|
|Magellan Midstream Partners||21.7x||$799||23.1x|
|Kinder Morgan Energy Partners||12.0x||$2,387||
From an enterprise value to EBITDA value, it's pretty clear that Kinder Morgan Energy Partners generates more profits per dollar of the company than the rest, but not from a price to distributable cash flow perspective. This goes back to those incentive distribution rights. In the first quarter alone, Kinder Morgan Energy Partners paid $467 million in incentive distribution rights and general partner distributions, which takes a large amount of available cash to the limited partners.
From a price to distributable cash flow ratio, though, its pretty clear that Energy Transfer Partners is by far and away the best bang for your buck when it comes to these MLPs. This isn't too surprising, though, because Energy Transfer Partners has barely seen its distribution grow over the past five years while Magellan Midstream is approaching 75% growth over that same time frame.
|Company||Distribution growth 2009-2014|
|Enterprise Products Partners||30.28%|
|Energy Transfer Partners||4.62%|
|Magellan Midstream Partners||72.54%|
|Kinder Morgan Energy Partners||31.43%|
What a Fool believes
When you consider all of these things in context, you can understand why Energy Transfer Partners is valued slightly less than other major pipeline MLPs. But after a five year spending binge on new projects and major acquisitions such as Sunoco Logistics and Susser Holdings, Energy Transfer should start to realize the benefits of these purchases and start increasing distributions on a more regular basis. If it starts to grow its distribution at rates similar to Enterprise or Kinder Morgan, then Energy Transfer could be one of the most undervalued MLPs on the market today.