Kinder Morgan (NYSE:KMI) and Enterprise Products Partners (NYSE:EPD) are two of the largest energy infrastructure companies in North America. Of the two, Kinder Morgan is larger as its total enterprise value is north of $130 billion. That makes it not only the largest energy midstream company on the continent, but it's the third largest energy company overall. Enterprise Products Partners, meanwhile, weighs in at $85 billion, making it one of the largest midstream MLPs in the U.S.
There's no question that these are two of the behemoths in the energy midstream space. While Kinder Morgan is the king, that might not necessarily mean it's the better buy. That's why we asked our energy contributors to weigh in on which one they thought was the better buy right now.
Enterprise Products Partners a screaming buy?
Tyler Crowe: When you think of energy, you think of two things: Oil and natural gas. What we tend to forget, though, is that there is a third product: natural gas liquids. That hybrid mixture that isn't quite oil but not gaseous hydrocarbons is typically overlooked by investors. That is perfect for Enterprise because it completely owns this esoteric market, and that massive market share is part of the reason why Enterprise is the better buy than Kinder Morgan today.
Superior returns: With a natural gas liquids pipeline network connecting to more than 95% of the facilities that process the product east of the Rockies and a massive amount of processing facilities and storage, Enterprise has developed a well-oiled machine that takes those fee-based revenues and turns them into superior returns. Over the past several years, it has held a strong lead on returns and today has returns on assets, invested capital, and equity that are more than double that of Kinder Morgan.
Expansion opportunities: Having that much control over the movement of a good, provides an immense amount of leverage to expand into different opportunities to profit from the product. One of Enterprise's big pushes today are exports. Unlike the political hurdles that involve exporting crude oil or the massive investment that is needed to build a liquefied natural gas facility, exporting natural gas liquids is pretty common, and for Enterprise a very profitable endeavor. Today the company controls more than 50% of the U.S.' propane and propane product export market, and expects that number to grow as it heavily invests in its pipeline network to deliver more product to the Gulf Coast, increase propane processing capacity, and expand its export capacity in the Houston ship channel.
Better buy today: Now you might expect a company that outperforms Kinder Morgan by that wide a margin would trade for a much higher valuation, but that isn't the case. Since we're trying to compare a traditional corporation and a master limited partnership, we need to look at Enterprise Value to EBITDA, which shows that Enterprise trades at a pretty strong discount to Kinder Morgan.
With a reputation of increasing its distribution while maintaining a very conservative coverage ratio and that cheap valuation, shares of Enterprise are just screaming, "Buy me now."
Or Kinder Morgan's growth prospects?
Matt DiLallo: While I've owned Enterprise Products Partners for many years and agree with Tyler wholeheartedly, I do see one reason why Kinder Morgan is a better right now. The company has a lot more visible growth potential, which is something I prefer to see and is why it trades at a premium valuation. That's seen in Kinder Morgan's very visible plan to grow its dividend by 10% annually through the end of the decade. That's quite a bit higher than Enterprise's less visible plan as it said it would like to continue its consistent distribution growth, which has averaged 6.2% per year for the past few years.
Part of the reason Kinder Morgan's plan has greater visibility for quicker growth is due to its robust project backlog. The company has a five-year project backlog that currently stands at $17.6 billion in projects. As the following slide notes, 90% of those projects are backed by fee-based pipeline and terminal assets, which the company already has contracts with customers to build.
In addition to that already contracted growth, the company has a number of other projects in the pipeline, so to speak, that look promising. This gives the company a lot of confidence it can hit its growth targets and continue to grow at a decent clip for years to come.
Meanwhile, Enterprise Products Partners' growth pipeline is a bit less robust. As we see on the next slide, the company has just $6 billion in projects under construction over the next two years.
While the partnership likely does have a number of other projects in the pipeline beyond 2016, it's not as forthcoming about them. Further, it doesn't have the megaprojects that Kinder Morgan has as it boasts the $5.4 billion Trans Mountain pipeline project in Canada to go along with the potential to move forward with the New England Direct, or NED, project to deliver natural gas to that region, which could be worth up to $6.5 billion in future investment. These projects have the potential to drive superior long-term growth.
If I were choosing between the two my choice would be to go with the company offering better visibility on future growth. The clear choice there is Kinder Morgan.
The bottom line here is we like both companies for different reasons. Kinder Morgan's stock comes with a premium valuation as investors are paying up for its visible future growth. Meanwhile, Enterprise offers a bit more value today, but with less visibility for future growth. The better buy today really depends on whether growth or value is more important.