Enterprise Products Vs. Plains All American: Which Is Best?

Ventory Check

tolgart

Overview

Enterprise Products Partners (NYSE:EPD) and Plains All American Pipeline, L.P. (NASDAQ:PAA) are two of the most successful pipeline companies in the USA.

With operations spanning North America, both EPD and PAA generate large amounts of revenue and cash flow and pay out significant distributions.

I have written about EPD comparing them to ET in Energy Transfer Vs. Enterprise Products Partners: Who Will Be The Investment Winner In 2025?” and also explaining why I think their share price has been caught in limbo over the past several years “Enterprise Products Partners: How Can A Great Company Have Zero Total Return Since 2014?“.

In this article, I will compare Enterprise Products Partners and Plains All American Pipeline, L.P.’s potential based on their 2022 second-quarter results to see which one is the best investment for 2025.

EPD is a much larger company than PAA

As the map below shows, EPD has a huge pipeline footprint of over 50,000 miles. The difference in size is most obvious when you look at total assets. EPD has $88 billion in assets (net of depreciation) and PAA has $33 billion.

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EPD

PAA on the other hand is much smaller starting as an oil and gas exploration company in 1981 generating about 100 barrels of oil per day. Since then, PAA has expanded into midstream assets all over North America.

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Plains All American Pipelines

Financial metrics

When we look at the financial metrics comparing the two companies on a TTM (Trailing Twelve Month) basis, several metrics jump out including the fact that PAA actually generates more revenue despite the large difference in assets.

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Seeking Alpha and author

Looking at the orange outlined items, we can see that EPD’s price-to-sales ratio (line 3) is almost 8x of PAA’s. EPD’s gross margin (GM) is much higher than PAA’s (line 5) but GM based upon Market Value and Enterprise Value (Lines 9 and 10) are much lower than PAA’s and could indicate that either PAA is underpriced or EPD is overpriced relative to each other. However, if you compare GM to assets deployed (line 8) both companies are about the same.

Keep in mind that a large part of the GM differences are due to different assets employed with EPD having many more miles of pipelines and PAA having many more storage facilities/tank farms. Needless to say, pipelines are much more expensive to build than tank farms which would, in large part, explain the large difference in margins and assets.

Debt/EBITDA (Line 16), Price to FCF (line 18), and the Dividend/distribution rate (line 20) are all about the same.

Comparing PAA and EPD Total Return over the last 1 year shows PAA has outperformed EPD with a return of 25% compared to 16% for EPD.

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Seeking Alpha

Looking over a longer period of five years, EPD’s 47% total return, which includes distributions, overwhelms PAA’s -15%.

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Seeking Alpha

Analysts’ ratings show both companies are well-liked by the investment community

Both Seeking Alpha writers and Wall Street analysts appear to really like these two stocks. The total of 49 Buy recommendations and only 1 Sell indicate that most analysts think these two stocks have a bright future ahead of them.

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Seeking Alpha and author

Interestingly enough, quants are not nearly as excited as the analysts, with a very modest “Hold” call for both stocks.

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Seeking Alpha

Do the quants know something that the other analysts don’t?

Historical price trends continue to be negative for both companies

If we look at the prices for major midstream companies from 2014 to the present, we can see a decidedly downward trend.

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Author

The carnage is universal, and even a conservative stalwart like EPD has seen a crushing decrease in the share price of 38%.

Note PAA’s price has fallen by more than twice the loss shown by EPD over that period.

The following chart compares the total return which includes distributions for EPD versus PAA since September 15, 2014. It shows that over that extended time period when both stock’s share prices dropped significantly, EPD was able to show a modest 6% gain while PAA showed a loss of more than 60% for the 8-year period.

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Seeking Alpha

EPD’s dividend/distribution history is much better than PAA’s

EPD has raised its dividend/distribution every year for the last 20 years and can be expected to continue that trend in the future.

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Seeking Alpha

PAA’s dividend/distribution has been much less exemplary and in fact, has been reduced significantly over the last 5 years.

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Seeking Alpha

So if you are looking for a steady, consistent dividend, the choice is easily EPD.

Revenue since the Covid outbreak has increased for both companies

Both companies have benefitted from the end of Covid restrictions and from the increase in oil and gas production since the Covid lows of 2020.

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Seeking Alpha

Conclusion

Midstream and pipeline companies are not the market’s favorite pick right now and likely won’t be in the future either. ESG and negative political headwinds will plague the market for the foreseeable future.

But that doesn’t mean that there is no potential in any MLPs. In PAA’s case, the steep drop in price over the last 8 years gives it a chance for nice capital returns if it just returns to the median price of the midstream/pipeline sector.

It has aided that cause by beginning a substantial share buyback program that has reduced its share count by more than 12% over the last 3 years. EPD, on the other hand, seems less inclined to buy back shares though it does increase the distribution every year.

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Seeking Alpha

Weighing everything documented above, investors really have two distinct investment choices when it comes to Enterprise Products Partners and Plains All American Pipeline, L.P.

With EPD, you have a safe conservatively managed company with 20+ years of distribution increases. So if solid, increasing dividends/distributions are your main concern then EPD is an excellent choice. But as the charts above show, you should probably not expect any significant capital gains.

PAA on the other hand has shown significant price volatility and has actually decreased its dividend three times in the last five years. However, it does have some potential for capital gains by just getting back to where they were 5 years ago. However, PAA is a much riskier investment option.

Based upon the above analysis, PAA is a Buy and EPD is a Hold.

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