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Both Energy Transfer (NYSE:ET) and Enterprise Products Partners (NYSE:EPD) are investment grade midstream master limited partnerships that sport attractive distribution yields. EPD has a vastly superior track record while ET is significantly cheaper.
In this article, we will compare them side by side and offer our take on which one is a better buy right now.
Enterprise Products Vs. Energy Transfer: Business Model
Both businesses enjoy significant diversification across geographies and commodities and generate fairly stable cash flows from long-term fixed-fee take-or-pay pipeline contracts. Only a small minority of the cash flows for both are considered commodity price sensitive.
Both also continue to spend a decent bit of money on growth capital expenditures and have also been active in the M&A space in recent years and continue to be open to further acquisitions moving forward (in contrast to others in the sector such as Magellan Midstream (MMP) and Plains All-American (PAA) who appear intent on selling off non-core assets in an attempt to shrink their overall footprint, dramatically reduce CapEx, and prioritize buying back units and paying down debt).
That said, a major difference between them is that ET has a history of being more aggressive in its growth capital projects and acquisitions whereas EPD has proven to be much more conservative. As a result, ET has been burned several times by regulators, operational sloppiness, and crashing energy markets, whereas EPD has stewarded investor capital much more responsibly. As a result, we give EPD the edge here.
Enterprise Products Vs. Energy Transfer: Balance Sheet
EPD clearly has a better balance sheet than ET given its industry-leading BBB+ (stable outlook) credit rating against ET’s BBB- credit rating. On top of that, its leverage ratio is much lower than ET’s (3.1x leverage ratio compared to ET’s expectation of reaching its leverage ratio target of between 4x and 4.5x by year-end), and its whopping $3.3 billion in consolidated liquidity is superior to ET’s $2.32 billion despite ET having a larger enterprise value. Finally, EPD’s weighted average term to maturity on its debt is an incredible 20 years, which is significantly longer than ET’s.
That said, ET’s balance sheet has dramatically improved over the past two years as management has aggressively paid down debt and plans to continue doing so moving forward. As it stated on its latest earnings call:
we’re clearly looking at paying down as much as we can. There is still a little bit to go as far as getting what our free cash flow is going to be. But in fairness, we do have a very good capacity left on our revolver from our credit facility. So we’ve got options as to how to navigate that, and we’re going to be careful. I don’t really want to get out in front of it and try to preannounce. But you nailed it when you said looking at trying to pay down as much as we can of [2023 debt maturities] if not moving some of it to the revolver only because when you look out over the remainder of the year and you see what the free cash flow continues throughout the year, we have a lot of financial flexibility right now is the way I’d like to leave that, and we’re going to play the best options we can of reaching all the targets that we want we’re going after.
As it continues to pay down this debt, management expects – based on its recent communications with the credit agencies – to receive a credit rating upgrade and eventually to be a nearer peer of EPD’s in terms of its balance sheet strength. For now, however, we still give the decisive edge to EPD here in this category.
Enterprise Products Vs. Energy Transfer: Distribution Outlook
EPD has one of the most impressive distribution growth track records in the midstream sector and has signaled that it has no plans of deviating from its commitment to consistent distribution growth moving forward. As it highlighted on its latest earnings call:
2022 marks our 24th year in a row for distribution growth, and we think next year, it’ll be 25 years in distribution growth… in talking to a lot of investors given the inflationary environment they’re in, they really appreciate the 5.6% distribution growth year-over-year. That’s helpful to a lot of our individual unitholders.
Given its 1.8x distribution coverage ratio at the moment and top notch balance sheet and asset portfolio, its distribution is not only very safe but also appears set to continue growing at a solid clip for years to come.
ET, meanwhile, has been growing its distribution rapidly this year. Back on October 25th, 2022, ET declared a $0.265 quarterly distribution, which marked an impressive 15.2% sequential increase and an over 70% year-over-year increase. However, ET plans to grow its dividend by at least an additional 15.1%, likely within the next quarter or two, to its target of $1.22 annualized.
As a result, while EPD’s impressive distribution growth track record and likely continued low to mid single digit annualized growth rate appears set to continue, we favor ET’s growth outlook for now as its near-term growth rate is likely to be vastly superior to EPD’s and its 2023 distribution coverage ratio (assuming a $1.22 distribution) is expected to be a very safe 2.1x.
Enterprise Products Vs. Energy Transfer: Valuation
Both businesses also look attractively priced when compared to sector peers as well as their own histories. Here is a side-by-side comparison of them:
| ET | EPD | |
| EV/EBITDA | 7.68x | 9.22x |
| EV/EBITDA (5-Yr Avg) | 8.91x | 10.65x |
| P/2023 DCF | 4.72x | 7.14x |
| Distribution Yield | 10.06% | 7.88% |
Overall, ET looks to be the clear winner in terms of cheaper valuation, however it is worth keeping in mind that EPD does have a much stronger balance sheet and a vastly superior track record which are worth paying a premium for. Both businesses look to be compelling bargains here, though ET clearly wins the competition in terms of valuation.
Investor Takeaway
We love both and own both of these midstream businesses. EPD obviously wins the competition for those looking for a “SWAN” (sleep well at night) midstream as its balance sheet, distribution growth track record, and superb management mean that it is likely to be a low-drama high yield income grower for many years to come while also delivering solid total returns.
However, for investors looking to maximize income and total return potential, ET is more appealing. On top of that, management’s aggressive focus on paying down debt over the past two years has made it much more palatable from a risk perspective. As a result, we view ET as offering the best risk-reward of the two, though we also think EPD is certainly attractive from that perspective as well. We rate both as Buys at the moment and think both businesses are well-positioned to weather an economic downturn given their long-term fixed fee contracts which deliver stable cash flow and cover their distributions easily.
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