EPD - Better Blue-Chip High Yield Buy: TC Energy Or Enterprise Products Partners

2023-05-17 18:52:43 ET

Summary

• TC Energy Corporation and Enterprise Products Partners L.P. are among the highest quality midstream companies in the market today.
• Both stocks also offer very high yields that are well-covered by stable cash flows and should be able to continue delivering payout growth moving forward.
• We compare their stocks side-by-side and offer our take on which one is a better buy right now.

TC Energy Corporation ( TRP ) and Enterprise Products Partners L.P. ( EPD ) are among the highest-quality midstream companies in the market today. Both also offer very high yields that are well-covered by stable cash flows and should be able to continue delivering payout growth moving forward. In this article, we compare TRP and EPD side-by-side and offer our take on which one is a better buy right now.

EPD Q1 Results

EPD recently reported strong Q1 FY 2023 results .

EPD's leverage ratio came in at 3.0x, right in the middle of its new, ultra-conservative leverage ratio target range. Moreover, its $4 billion in liquidity and 20-year weighted average term to maturity of its debt provides it with enormous financial flexibility. The financial strength of the partnership was recognized by S&P, which upgraded them from BBB+ to A-, giving them the best credit rating in the midstream sector.

EPD continues to repurchase units opportunistically and grow the distribution. Management emphasized that it will be evaluating a second hike of the quarterly distribution in the coming months similar to what they did last year.

EPD should continue to see solid growth, thanks to the abundance of capital projects that it will be bringing online in the coming quarters. This, in turn, will likely continue to push its leverage ratio lower, which could prompt EPD to increase its distribution faster, make additional acquisitions, and/or possibly even pay out a special distribution/ accelerate the unit buyback program.

Overall, it was another strong quarter for EPD, with management continuing to run the partnership in a very conservative manner while also returning generous amounts of capital to unitholders. EPD remains probably our single favorite holding in our Retirement Portfolio , as it epitomizes our goals for the portfolio: stable and growing highly attractive income alongside good long-term total return potential with low fundamental and balance sheet risk.

TRP Q1 Results

TRP also recently reported its Q1 FY 2023 results. Highlights included:

TRP posted strong numbers, with Q1 comparable EBITDA up by a whopping 16% year-over-year, with particular strength in its natural gas pipeline business.

Management also announced solid progress on its capital projects and said that it is making good progress towards executing $5 billion plus in asset sales this year. Completing these new projects as well as completing these asset sales will help it achieve its leverage ratio target of below 5x.

Moving forward, management has guided for no more than $7 billion in annual capital spending (including maintenance capital expenditures) while targeting closer to $6 billion per year for CapEx. It plans to use the cash savings from this high-graded capital program to accelerate debt reduction and - once its leverage ratio target is achieved - potentially accelerate opportunistic share buybacks.

TRP remains a low-risk investment for us that combines very high-quality assets with solid long-term growth potential and an attractive and growing current yield. We expect that once management closes its proposed asset sales at attractive valuations and closes in on its leverage target that the stock price will move meaningfully higher, back closer to historical norms, delivering substantial risk-adjusted alpha for shareholders.

EPD Stock Vs. TRP Stock: Business Models

TRP has a robust business model due to its impressive asset portfolio. TRP's assets mostly enjoy long-term, fixed-fee contracts along with regulatory protection on existing pipelines and promising pipeline projects that should add substantively to EBITDA in the coming years. TRP's natural gas pipeline business, spanning the United States, Canada, and Mexico, accounts for approximately 75% of its EBITDA, while the remaining quarter is generated by its liquids pipelines and power and storage assets.

TRP's notable assets include the Keystone crude pipeline, the second largest in the industry, which delivers crude oil to vital markets in the Gulf Coast and Midwest of the United States. The NGTL and Mainline natural gas pipelines are also significant, as they transport 75% of Western Canada's natural gas takeaway capacity, playing a crucial role in the country's energy export infrastructure.

With operations across three countries, 35 U.S. states, 12 Mexican states, and seven Canadian provinces, TRP boasts an extensive footprint, positioning itself as a key player in midstream infrastructure. Its ownership of one of North America's largest natural gas networks allows it to connect cost-effective basins to high-demand markets.

Furthermore, TRP enjoys a stable cash flow profile. Its crown jewel assets, the NGTL and Mainline pipeline networks, have long-term take-or-pay contracts that are fully contracted at present. The Mexican projects benefit from 25-year take-or-pay contracts supported by Mexican state-owned agencies, adding a conservative element to TRP's endeavors. The Keystone pipeline is also fully contracted with a 20-year agreement, and the Bruce Power business holds contracts exceeding 30 years with the Canadian province of Ontario. These factors contribute to TRP's optimistic outlook for consistent cash flow.

EPD, meanwhile, boasts a highly diversified asset base and geographical presence, giving it numerous opportunities for investing in high return organic growth projects and/or bolt-on acquisitions. The company aggregates a wide range of hydrocarbons from multiple sources in major producing basins and delivers them to various end markets.

EPD is particularly strong in its natural gas liquids business segment and also has a strong petrochemicals unit that converts low-cost U.S. molecules into valuable exports. As U.S. NGL exports increase in the coming years, EPD is well-positioned to continue enjoying growth tailwinds thanks to its comprehensive assets and control over the NGL value chain.

Enterprise's asset quality, contract coverage, and marketing operations all contribute to its competitive positioning and should deliver sustained growth and profitability for the partnership for years to come. Moreover, its long-term contracts provide cash flow stability, while its marketing operations allow it to capture additional fees and exploit arbitrage opportunities as energy market conditions evolve.

Both businesses boast very impressive asset portfolios. That said, TRP's regulated exposure gives it a slight edge over EPD in our view, as these assets should prove to be the most resilient in the face of energy market volatility and energy sector disruption.

EPD Stock Vs. TRP Stock: Valuations

When it comes to valuation, both stocks look undervalued right now. TRP looks particularly attractively priced compared to its recent price chart:

TRP's EV/EBITDA ratio is currently at 11.23x, over one turn below its 10-year average of 12.25x. Moreover, its dividend yield is 6.85%, a full 200 basis points above its 10-year average of 4.84%. Given the strength of its assets and balance sheet , the 12.3% distributable cash flow yield and expected ~5% annualized EBITDA CAGR over the next half decade make TRP quite a compelling risk-adjusted investment opportunity. The growth plus yield alone should deliver 10-12% annualized total returns, while potential multiple expansion could easily push annualized total returns to 15% or even higher. For a low-risk investment, this is a very attractive total return profile.

EPD, meanwhile, also offers investors an attractive total return proposition. Its forward 9.09x EV/EBITDA ratio is quite low on a risk-adjusted basis relative to peers. Moreover, its 7.9% distribution yield and 13.6% distributable cash flow yield provide an attractive risk-adjusted return on their own without accounting for any growth. That said, EPD is expected to grow EBITDA at a ~2% CAGR over the next half decade, pushing the yield plus growth total return to ~10% before accounting for any multiple expansion, which we think is also likely moving forward. As a result, we expect EPD to deliver 10-13% annualized total returns moving forward.

EPD Stock Vs. TRP Stock: Investor Takeaway

We think both Enterprise Products Partners L.P. and TC Energy Corporation belong in any dividend growth investor's portfolio, especially for those looking to maximize current yield while also minimizing risks heading into a recessionary environment. EPD and TRP are also fairly well insulated against inflation, which further enhances their appeal in the current environment.

While we slightly favor TC Energy Corporation at the moment due to its slightly more attractive total return potential and slightly stronger asset portfolio, Enterprise Products Partners L.P. is not far behind in each area and its balance sheet is also stronger than TRP's. Note that TC Energy Corporation is a Canadian Corporation and Enterprise Products Partners L.P. is a K-1 issuing MLP, so keep the tax implications in mind before investing.

For further details see: