Master Limited Partnerships, or MLPs, have been gaining attention recently as investors struggle to find yield and in the field of MLPs, two companies stand apart from the crowd: Kinder Morgan Energy Partners, L.P. (KMP) and Enterprise Products Partners, L.P. (EPD). They are the largest and most expansive companies in the Alerian MLP Index, and some would argue they are the best managed, too. Together, these companies make up about a quarter of the Index, with EPD taking the top spot accounting for 15.6% of the index. In comparison, KMP's weight in the index is 9.9%. These two companies are the benchmarks which all other MLPs are measured against, but how do they measure up against one another?
EPD is clearly the bigger company, measured by both market cap and enterprise value. As for the geographic diversity of assets and operations, they're both centered around the gulf coast and branch off from there, extending across North America. Please note some assets owned by KMP's General Partner are included on the KMP map.
|Debt to Equity||1.2||1.85|
Both companies offer large yields, which is typical for MLPs, but at the current share price, KMP has the upper hand when it comes to distribution payments.
Their price to book ratios are almost identical, but on a price to sales basis, you can see KMP is more than three times as expensive. They also have somewhat similar capital structures, with EPD being the less indebted of the two.
For price to earnings, that is not a typo. KMP common units (common units are the shares which are publicly traded on stock exchanges) really do trade at over 300 times earnings while EPD trades at a more reasonable 21 times earnings. How can a three fold difference in price to sales lead to a 15 fold difference in price to earnings? The answer can be found in the following excerpt from KMP's Consolidated Statements of Income:
Simply put, majority of the profits are attributed to the General Partner. While this may be a sign for investors to be cautious, it does not appear to limit the cash distribution to Limited Partners, which is over 1,800% of the Limited Partners Net Income. The cash flow statement may also signal caution to some investors.
In 2011, common unit holders received less than half of the cash distributions with the largest portion of distributions going to the General Partner. While the General Partner only holds a 2% equity interest in KMP, they own the Incentive Distribution Rights, or IDRs. This allows them to receive a disproportionate amount of the cash distributions in accordance with the following distribution schedule:
Allocation of Distributions from Operations. Cash from operations for each quarter will be distributed effectively as follows:
- First, 98% to the owners of all classes of units pro rata and 2% to our general partner until the owners of all classes of units have received a total of $0.15125 per unit in cash or equivalent i−units for such quarter;
- Second, 85% of any available cash then remaining to the owners of all classes of units pro rata and 15% to our general partner until the owners of all classes of units have received a total of $0.17875 per unit in cash or equivalent i−units for such quarter;
- Third, 75% of any available cash then remaining to the owners of all classes of units pro rata and 25% to our general partner until the owners of all classes of units have received a total of $0.23375 per unit in cash or equivalent i−units for such quarter; and
- Fourth, 50% of any available cash then remaining to the owners of all classes of units pro rata, to owners of common units and Class B units in cash and to owners of i−units in the equivalent number of i−units, and 50% to our general partner.
In contrast to KMP's cash distribution policy, EPD has eliminated all the equity interest of their General Partner and eliminated all IDRs. It is difficult to tell if this will have a significant effect on cash distributions as this was a fairly recent occurrence. Historically, however, EPD has maintained very steady increases.
KMP, while slightly less predictable, is right there with EPD in terms of distribution growth.
These companies are so similar by so many measures that it's hard to pick a clear winner. Which you decide to buy may depend largely on your needs, personality and portfolio. If you are looking for extra yield to supplement the low interest rates on treasuries, EPD may be right for you based on its stability and lower debt level. If you are looking for capital appreciation, perhaps KMP deserves your attention based on it's greater leverage and more aggressive growth strategy.
Disclosure: I am long (EPD)