MLPS - Enterprise Products Partners Vs. MPLX: Only One Of These Is A Buy

2023-12-29 10:15:34 ET

Summary

• Enterprise Products Partners and MPLX are midstream MLPs with safe and growing high-yield distributions.
• Both have impressive track records of growing their payouts and delivering value to unitholders.
• We compare them side-by-side and explain why we think only one of these is a Buy right now.

Both Enterprise Products Partners ( EPD ) and MPLX ( MPLX ) are blue-chip midstream MLPs ( AMLP ) that offer investors an attractive combination of safe and growing high-yield distributions, investment-grade balance sheets, and defensive business models that generate stable cash flows through a wide range of macroeconomics and energy industry environments. In this article, we compare them side-by-side and offer our take on which is the best buy right now.

EPD Stock Vs. MPLX Stock: Business Model

EPD has a well-diversified and fully integrated business model, with a vast network covering the major shale basins in the US and strategic export facilities along the Gulf Coast. This network extends across numerous segments of the midstream energy sector, providing EPD with a balanced and resilient earnings profile. In particular, EPD operates four business segments - Natural Gas Liquids (NGLs), Crude Oil, Natural Gas, and Petrochemical & Refined Products Services - ensuring that the company is not overly dependent on any single product or market. Such diversification helps hedge against sector-specific downturns and provides the partnership with multiple growth avenues.

In addition, EPD's fully integrated business model gives it a competitive advantage in that its assets, including pipelines, storage facilities, and processing plants, are interconnected, enabling efficient handling of products from extraction to transportation and storage, leading to cost efficiencies and enhanced service offerings. Moreover, EPD's access to the Mont Belvieu NGL hub positions the company as a critical player in the NGL market.

In contrast, MPLX takes a more focused approach in its business model, primarily operating in just two segments - Logistics and Storage (L&S) and Gathering and Processing (G&P) - and primarily services natural gas, NGLs, and crude oil through its infrastructure. MPLX has a very close relationship with Marathon Petroleum Corporation ( MPC ), which is its controlling unitholder and serves as a key counterparty for many of MPLX's assets, though it is taking some measures to try to diversify its exposure beyond MPC.

While having a close relationship with a financially sound counterparty in MPC certainly has its benefits (such as a large incentive to continue to grow its distribution since MPC benefits tremendously from the distributions it receives on its investment in MPLX as well as a predictable source of demand for its infrastructure assets), MPLX's reliance on MPC also brings with it risks by closely linking its fortunes to the operational and financial health of MPC while also potentially exposing unitholders to conflicts of interest in the event that MPC decides to exploit MPLX for its own gain.

Overall, we think that EPD's more diversified approach offers better risk-reward than MPLX's model, and - while MPLX has certainly generated strong results in recent years - over the long-term, we prefer the better balance between risk mitigation and growth potential that EPD's business model offers compared to MPLX's.

EPD Stock Vs. MPLX Stock: Balance Sheet Comparison

EPD's balance sheet is also convincingly stronger than MPLX's, as evidenced by its industry-leading A- credit rating compared to MPLX's BBB rating. When we look deeper at the details of their respective balance sheets, we see that both partnerships fully deserve their investment grade status.

EPD has an impressive weighted average term to maturity on its debt of almost 20 years, with a substantial portion of its debt not maturing for over 30 years and nearly all of it has fixed interest rates, positioning it very well to weather a period of higher for longer interest rates and giving it little to no dependence on capital markets to support its growth investments. Moreover, EPD has an impressive $4 billion in liquidity available, combined with its conservative debt maturity structure and significant free cash flow generation to provide it with substantial financial flexibility.

MPLX, meanwhile, does not match EPD's impressive maturity calendar, but still generates significant free cash flow net of its distributions and has well-laddered debt maturities in the coming years, giving it the optionality of paying down much of its maturing debt if it wishes to do so.

EPD's leverage ratio stands at an impressive 3.0x, well below MPLX's 3.5x, although both ratios indicate conservative leverage levels that put both companies in very strong financial shape.

In summary, while both EPD and MPLX have strong balance sheets, EPD's higher credit rating, more favorable debt maturity profile, greater liquidity, and lower leverage ratio give it a considerably stronger balance sheet.

EPD Stock Vs. MPLX Stock: Capital Allocation Strategy

EPD's impressive track record of growing its distribution at a steady pace for each of the past twenty-five years is a testament to its prudent capital allocation strategy. Moreover, its current distribution coverage ratio, standing at a very conservative 1.7 times on a distributable cash flow basis, indicates that the distribution is quite safe and likely to continue growing for years to come, especially when combined with the quality and strength of its business model and balance sheet.

MPLX, meanwhile, also has a very impressive distribution growth profile, with an 11-year growth streak and an over 11% distribution per unit CAGR over the past decade. While it has a slightly lower distribution coverage ratio compared to EPD's of 1.5x, it is still covering its distribution quite easily and is likely to continue growing its distribution moving forward.

Both businesses have also repurchased units over time, though MPLX has been more aggressive in this regard over the past three years:

When it comes to the outlook for both businesses, EPD is continuing to invest considerable sums of money in growth capital expenditures, though its track record of generating high returns on invested capital and pursuing low-risk projects and bolt-on acquisitions means that this is likely a good source of capital. This is especially prudent given that EPD still generates considerable free cash flow net of these expenditures with which it can fund its distribution and opportunistic buybacks and it also has a very low leverage ratio.

Meanwhile, MPLX has been dramatically reducing its capital expenditures in recent years after a major spending binge in the second half of the 2010s. This has freed up considerable free cash flow for returning to unitholders and deleveraging the balance sheet.

Analyst consensus distribution growth projections have both EPD and MPLX growing their distributions at a mid-single digits CAGR over the next several years. Given that EPD's leverage is already quite low and expected to drop even further in the coming years as its major projects come online, we also expect EPD to pay out a substantial special distribution and/or buy back a significant number of units, assuming no significant acquisition comes across its path.

EPD Stock Vs. MPLX Stock: Valuation

MPLX stock has a current EV/EBITDA ratio of 9.14x, which is slightly below its 5-year average of 9.19x, suggesting that it is roughly fairly valued. In contrast, EPD stock's current EV/EBITDA ratio stands at 9.10x, which is well below its 5-year average of 9.83x, indicating that it is meaningfully undervalued relative to its historical average.

That being said, when we consider the price to 2024 estimated distributable cash flow ratios, EPD's stands at 7.23x compared to MPLX's slightly lower 7.09x, suggesting that they are similarly valued on a DCF yield basis.

In terms of distribution yields, EPD's distribution yield of 7.90% is in line with its five-year average of 7.87%. MPLX's distribution yield of 9.46%, meanwhile, while attractive, is significantly lower than its five-year average yield of 10.63%.

EPD Stock Vs. MPLX Stock: Investor Takeaway

MPLX appears poised to deliver high single-digit annualized total returns for the foreseeable future, as its projected growth is likely offset by the fact that its distribution yield and EV/EBITDA indicate that it is slightly overvalued at present, leaving the distribution as the likely sole driver of its total returns. Meanwhile, EPD appears poised to deliver low to mid-teens annualized total returns for the foreseeable future due to its current distribution yield plus expected growth likely combining with its undervalued EV/EBITDA ratio as well as its growing balance sheet flexibility and potential buybacks/supplemental distributions.

Moreover, while both businesses have sound business models and balance sheets, EPD definitively wins the comparison in both of these categories, making it a lower-risk investment.

As a result, we think both MPLX and EPD are worthy of consideration in a broadly diversified income portfolio, but believe that only EPD merits a Buy rating at the moment.

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