Kinder Morgan Inc (NYSE:KMI) is a favorite among high-yield income investors and deservedly so. However, sometimes smaller and lesser known companies can make better growth prospects while still offering a high and fast growing dividend. Markwest Energy Partners (UNKNOWN:MWE.DL) is one such fast growing midstream MLP that investors may want to considering buying instead of Kinder Morgan. To potentially help you make that decision, we asked two of our energy contributors which one they think is a better buy today.
Adam Galas: While I think both Kinder and Markwest are great high-yield investments and deserve a spot in many income investor's portfolios there are three reasons why I think Markwest may end up outperforming Kinder over the next decade or so. Namely, its dominant market position in the prolific Marcellus and Utica shale, a longer growth runway, and its superior distribution profile.
Dominant market position: Markwest's claim to fame is that it is the No. 1 natural gas processor and fractionator operator -- separates natural gas liquids, or NGLs, from natural gas -- in the booming Marcellus and Utica shales.
With 6 billion cubic feet per day of gas processing capacity -- half of which is in the Marcellus region -- and plans to grow its Marcellus processing capacity by 52% by mid-2016 I view Markwest as the better long-term income investment to profit from one of the world's largest and fastest growing gas formations.
In the Utica shale -- which is growing gas production even faster than the Marcellus -- Markwest is planning on growing its gas processing capacity 62% by Q1 of 2016.
The MLP is also investing heavily into NGLs, which have enormous potential as both cheap petrochemical feedstocks for U.S. chemical companies along the Gulf Coast that make plastics and ethylene, as well as a major potential export to markets to Asia, South America, and Europe.
Longer growth runway: At an enterprise value of $140.4 billion, Kinder Morgan is one of the largest energy companies in America, and 8.6 times larger than Markwest, whose enterprise value is just $16.4 billion.
Yet Markwest, which operates 4,000 miles of pipeline across its entire system -- 21 times less than Kinder -- is working hard to catch up to its bigger brother. For example, in the Marcellus and Utica shales the MLP is constructing 18 gas processing and fractionation facilities to service the insatiable needs of gas producers. It's also partnering with Sunoco Logistics Partners to construct the Mariner East and Mariner West pipelines to transport NGLs to key markets and export terminals.
All told analysts expect Markwest to grow its EBITDA or earnings before interest, taxes, depreciation, and amortization, 50% over the next three years, a growth rate that Kinder Morgan -- with its enormous size -- most likely can't hope to match.
Superior yield and payout growth potential:
|Midstream Operator||Yield||Management's 5-Year Payout Growth Guidance|
|Markwest Energy Partners||5.20%||10.7%|
|Kinder Morgan Inc||4.20%||10%|
As this table shows, not only is Markwest currently offering a higher yield than Kinder Morgan, but its management expects its distribution growth over the next five years to be 7% greater than Kinder's.
Given Markwest's rapidly growing portfolio of Marcellus and Utica assets, and the fact that it isn't burdened with any incentive distribution rights, I think these payout growth estimates are reasonable. In addition, I think management may be lowballing their distribution guidance, and given that analysts are expecting 17.6% CAGR payout growth over the next five years I think there may be some upside potential here.
Jason Hall: Adam makes a great case for Markwest, and he's got a lot of valid points. However, I think it would be a big mistake to count Kinder Morgan out just yet. After all, the company and its subsidiaries have produced some of the best shareholder returns in the industry for more years, and at more than eight times larger than Markwest, its scale has a lot of benefit, too.
At the beginning of 2015, Kinder Morgan's five-year expansion project pipeline was more than $18 billion, meaning it is planning to "bolt on" more in new revenue-generating assets than Markwest is worth over the next half-decade. Kinder Morgan also benefits from its exposure to multiple markets and geographies, while Markwest's exposure to only a handful of major plays could turn out to be a weakness at some point. Either way, it certainly creates some risk for the company, as it is -- at this point in its size -- more exposed to downside risks because of the concentrated nature of its assets.
Kinder Morgan, on the other hand, owns or has an interest in more than 84,000 miles of pipelines, hundreds of terminals, and even operates seagoing ships to transport products:
Sure, Markwest's upside growth potential is probably superior to Kinder Morgan's at this point, but maybe the most important poorly considered factor when investing is downside risk. Frankly, it's pretty clear which of these two has more risk of capital loss due to potentially unforeseen events, and it's not Kinder Morgan.
Lastly, much of Markwest's growth is likely to come at the expense of unitholder dilution. Yes: Kinder Morgan's share count just doubled, but per-share value was probably increased because the doubling was the result of merging all of the company's subsidiary MLPs into its corporate structure. Going forward, the company -- this is my belief -- could begin buying back shares and reducing the share count, further growing per-share returns. This will also reduce the total cost of increasing the dividend, since there will be fewer shares to pay on.
I think it's probably a few years from happening because there are still a lot of organic growth opportunities, but at some point that will change, and Richard Kinder will realize that the best way to return cash to shareholders is to start buying back shares.
Markwest, on the other hand, is an MLP. MLPs almost always use unit offerings and debt to pay for asset growth. That's certainly been the track record at Markwest so far:
With these things in mind: Risk profile of its asset base; the rate of dilution and debt expense that MLPs tend to use for growth; and the potential for share buybacks at Kinder Morgan enhancing its dividend and per-share growth, and I think Kinder Morgan has a solid chance at creating better per-share returns than Markwest over the next decade.