CA - Better High-Yield Buy: Enbridge Or Antero Midstream?

2023-04-04 07:30:00 ET

Summary

• Enbridge and Antero Midstream both offer high dividend yields that are well covered by distributable cash flow.
• Enbridge has an investment-grade balance sheet while Antero offers a higher yield.
• We compare them side by side and offer our take on which is the better buy right now.

Both Antero Midstream ( AM ) and Enbridge ( ENB ) are midstream businesses that offer high dividend yields. ENB has an investment grade balance sheet while AM offers a higher yield. In this article, we will compare them side by side and offer our take on which one is a better buy.

Antero Midstream Vs. Enbridge - Business Model

While both AM and ENB are midstream businesses, their business models are quite different.

The first major difference between them is size. AM's enterprise value is a mere $8.5 billion, which pales in comparison to Enbridge's immense enterprise value of $146.3 billion.

AM's smaller enterprise value is due to its smaller and more focused footprint relative to ENB. While ENB boasts some of the largest midstream assets in North America (including the continent's longest crude oil pipeline and its largest natural gas distribution business, as well as the second-longest natural gas transmission network in the United States), AM owns and operates only a few hundred miles of pipelines.

Additionally, ENB has a well-diversified set of counterparties (95% of whom have an investment grade credit rating) whereas AM derives nearly all of its business from Antero Resources ( AR ) (which is not yet investment grade, though it is rapidly deleveraging and should become investment grade in the not-too-distant future).

That said, both businesses generate stable cash flows that are largely fee-based and commodity price resistant while coming from long-term contracts. Moreover, they both service production basins that have lengthy production profiles, giving the vast majority of their assets healthy service lives.

Antero Midstream Vs. Enbridge - Balance Sheet

ENB once again dwarfs AM in this category as ENB's leverage ratio currently falls within the lower half of management's target range whereas AM is still working on deleveraging its balance sheet as rapidly as possible. In fact, management is pouring all of its free cash flow net of dividends into paying down debt at the moment and expects to do so until sometime next year.

Furthermore, AM lacks an investment grade credit rating while ENB has one of the very best in the midstream sector at BBB+.

Both businesses have well-laddered debt maturities, but ENB has the majority of its debt termed out at fixed interest rates many decades into the future (as late as the 2080s for some of it!). That said, AM has no debt maturing until 2026, so it is able to opportunistically pay down debt rather than begin forced to refinance maturities while interest rates are elevated.

Overall, neither business is in any material financial risk at the moment but ENB overall definitely has a stronger balance sheet given its superior credit rating and its large amount of debt that is termed out so far into the future at attractive interest rates.

Antero Midstream Vs. Enbridge - Dividend Outlook

Both businesses have very safe dividends, with AM expected to cover its payout 1.6x with distributable cash flow in 2023 and ENB expected to cover its dividend 1.5x with distributable cash flow this year.

That said, given that ENB's leverage ratio is in a better place relative to its long-term targets than AM's is, ENB has a better dividend growth outlook over the next few years, with the company likely to grow its dividend roughly in-line with distributable cash flow per share moving forward (3-5% CAGR) whereas AM has essentially stated that they are not planning to grow their dividend at all for the next year or two until they reach their long-term leverage target.

Over the longer term, however, AM could have a better dividend growth outlook given that its current dividend coverage ratio is higher than ENB's is and its assets are a bit growthier and smaller in scale than ENB's. On the other hand, ENB can sustain a lower dividend coverage ratio given that its credit rating is stronger and its asset portfolio is better diversified relative to AM's.

Antero Midstream Vs. Enbridge - Track Record

When it comes to track record, ENB completely crushes AM. Since AM went public, it has generated a negative total return whereas AM has generated strong returns:

Moreover, ENB has an impressive 27 year dividend growth streak whereas AM had to cut its dividend during the energy crash in 2020.

Last, but not least, ENB has delivered exceptional long-term outperformance for shareholders, a feat that AM is a long way from matching:

Antero Midstream Vs. Enbridge - Risks And Catalysts

AM is a more speculative, highly concentrated investment with its fortunes hinging on the performance of a single counterparty, a single geographic region, and a single energy commodity (natural gas).

In contrast, ENB is much larger and far better diversified, with its risk spread across numerous energy commodities and even a growing renewable power production business, numerous - mostly investment grade - counterparties, and a presence across numerous geographic regions.

As such, AM could turn out to be a bigger winner, but its range of potential outcomes is much wider than ENB's is.

Antero Midstream Vs. Enbridge - Valuation

AM appears to be clearly cheaper than ENB across every major valuation metric, though we would rate both as a Buy right now:

Investor Takeaway

Both AM and ENB look like attractive buys at the moment, with each trading at a discount to their historical EV/EBITDA average and offering attractive and safe yields.

However, when picking between the two, investors need to keep in mind that with AM they get a higher current dividend yield, greater valuation multiple expansion potential, and greater long-term growth potential. On the other hand, ENB totally crushes AM from a quality perspective, as it boasts a vastly larger and better diversified portfolio, much better counterparties, a more reliable and clearer dividend growth profile, a stronger balance sheet, and a far better track record which likely indicates that its management is superior.

Another important distinction between the two is that AM is a U.S. company whereas ENB is Canadian, so keep that in mind when factoring in tax implications (both issue 1099 tax forms instead of K-1s). At High Yield Investor we are finding better alternatives in the midstream sector at the moment, but rate both of these a Buy. For investors looking for a higher yield and a more speculative investment, AM is the better buy. However, for those looking for a well-rounded blue chip that will continue to churn out reliable dividend growth for years to come through thick and thin, ENB is the clear winner. There is also nothing wrong with owning both. Which do you prefer?

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