AMLP - Forget MPLX 3 Reasons To Buy Enterprise Products Partners Instead

2023-10-23 08:35:00 ET

Summary

• MPLX and Enterprise Products Partners are high-yielding midstream businesses with strong track records of distribution growth and attractive total returns.
• We compare them side-by-side to see which is the better buy today.
• We share three reasons why we believe that EPD is the better risk-adjusted choice.

MPLX ( MPLX ) and Enterprise Products Partners ( EPD ) are both investment grade, high yielding midstream businesses that have impressive track records of growing their distributions through good times and bad while also delivering very attractive long-term total returns for unitholders.

Since MPLX went public, it has delivered total returns that have totally crushed those of the broader midstream sector ( AMLP ):

EPD has also significantly outperformed AMLP over the long term:

That said, when comparing EPD with MPLX, EPD emerges as the clear winner in terms of which is the better risk-adjusted buy right now. Here are three reasons why:

1. EPD Has A Better Balance Sheet Than MPLX's

EPD beats MPLX in this category hands down, as evidenced by its sector-leading A- credit rating compared to MPLX's BBB credit rating. EPD's leverage ratio of 3.0x is well below MPLX's 3.5x leverage ratio, though both are certainly at a conservative level.

Additional metrics that support EPD's edge in this category are its robust $4 billion in liquidity, substantial free cash flow generation net of distributions, weighted average term to maturity on its debt of nearly 20 years, including over half of which is termed out to 30+ years.

Meanwhile, while MPLX lacks the impressive debt maturity calendar that EPD has, it is still expected to generate between $1.2-$1.4 billion in free cash flow net of distributions annually through 2027 and sums to only ~$1 billion less than the amount of debt that MPLX has maturing over that period. As a result, it is well positioned to soften the blow to its interest expense that may come from having to refinance debt at higher interest rates.

As a result, we can conclude that both businesses have strong balance sheets, but EPD's is still head and shoulders above MPLX's.

2. EPD Has A Superior Business Model To MPLX's

Both businesses have strong and stable business models overall.

MPLX manages midstream energy infrastructure assets across two main segments: (1) Logistics and Storage and (2) Gathering and Processing. Their operations include handling natural gas, natural gas liquids, crude oil, and other hydrocarbons. They also transport products in the Mid-Continent and Gulf Coast and have terminals for refined petroleum. As a subsidiary of Marathon Petroleum Corporation ( MPC ), MPLX is uniquely positioned near Marathon refineries, often serving as their exclusive provider. This strategic location poses barriers for competitors. Furthermore, MPLX's long-term contracts with Marathon ensure stable cash flow, making it resilient in the face of broader industry and macroeconomic fluctuations.

EPD's top-tier portfolio is diversified by asset, energy type, and geography, with four key business segments: (1) NGLs, (2) Crude Oil, (3) Natural Gas Pipelines & Services, and (4) Petrochemical & Refined Products Services. Its integrated business model and strategically located assets offer significant competitive advantages, presenting numerous opportunities for high-return investments and synergistic acquisitions.

EPD's asset portfolio is overall better than MPLX's in our view as it has connections to every major U.S. shale basin and owns strategically located export facilities out of the Gulf Coast. Moreover, its comprehensive NGL network offers unparalleled access to Mont Belvieu. While MPLX's portfolio is also pretty good - especially its refining and Appalachia-based gathering and processing assets - it still lacks the strategic depth and breadth that EPD has.

Moreover, its larger scale and geographic and asset diversity give it access to more high returning, low risk growth investment opportunities as well as bolt-on acquisitions. EPD's diversified operational footprint spanning natural gas liquids, crude oil, natural gas, and petrochemicals offers a balanced and resilient earnings profile. In contrast, MPLX is more concentrated geographically, has greater tenant concentration risk, and lacks the petrochemical exposure that EPD enjoys. As a result, we see EPD as having a more promising long-term growth profile compared to MPLX.

Another big reason to favor EPD over MPLX is that EPD's insiders own a significant ~32% of the company's equity. This substantial stake not only underscores the management's belief in the company's long-term prospects, but also ensures that their interests are aligned with those of the shareholders.

Meanwhile, MPLX is largely beholden to MPC, which owns a large percentage of their equity and is also their primary business counterparty. While MPLX benefits from the steady stream of business and operational synergies from its relationship with MPC, it also exposes MPLX to the operational and financial risks associated with MPC. Any adverse event affecting MPC could have an outsized effect on MPLX. In contrast, EPD's diversified client base and operations insulate it from such concentrated risks. Moreover, in the past MPC has sold mediocre assets to MPLX at a price that proved to be a bit rich via the Andeavor Logistics transaction . There is always the chance that MPC could execute a similar transaction in the future, which would likely hurt MPLX unitholder value.

3. EPD Stock Trades At A More Attractive Valuation Than MPLX Stock

A final reason why we like EPD more than MPLX right now is that its valuation looks much more appealing. MPLX currently trades at an EV/EBITDA of 9.35x whereas EPD trades at a nearly identical EV/EBITDA of 9.47x. However, when compared to their 10-year averages, EPD's valuation is at a more significant discount (12.23x 10-year average EV/EBITDA for EPD compared to an 11.64x 10-year average EV/EBITDA for MPLX). Moreover, on a five-year basis, MPLX's EV/EBITDA currently stands at a slight premium (9.25x five-year average EV/EBITDA for MPLX), whereas EPD's stands at a discount (9.91x five-year average EV/EBITDA for EPD).

Investor Takeaway

When factoring in EPD's stronger balance sheet, overall superior business model, greater insider alignment and less questionable ownership structure given MPLX's close relationship and dependence on MPC, EPD appears to be a much more compelling risk-adjusted buy right now.

MPLX is not a bad investment opportunity either, as its 9.3% next twelve month distribution yield - that is well-covered by distributable cash flow - complements its fairly strong business model and balance sheet to make it an attractive income investment. However, EPD's very low risk balance sheet, strong business model, and even more compelling valuation make it the clear winner in the comparison of these two businesses in our view.

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