Energy Transfer Is A Better Value Than Enterprise Products Partners Based On A Multipoint Analysis

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About: Enterprise Products Partners L.P. (EPD), ET
by: Steven Fiorillo
Summary

Energy Transfer's total assets were 54.65% larger than Enterprise Products Partners at the end of Q2 2019, totaling $32.09 billion.

Energy Transfers property plant and equipment is just over $42 billion larger than Enterprise Products Partners, which is a difference of 105.42%.

Energy Transfer generated better metrics off its distributable cash flow than Enterprise Products Partners as the coverage ratio was 0.2x larger with an additional $60 million retained after distributions.

Energy Transfer, based on my analysis, provides better value today as the company won more points in my grading system than Enterprise Products Partners.

I recently wrote an article on Energy Transfer (ET) and Enterprise Products Partners (EPD) after both companies reported Q2 earnings. I received several messages in my inbox asking if I preferred ET to EPD, or vice versa. As a shareholder of both companies I never really stopped to think about which company was better or which I preferred as an investment. It’s really an interesting question, and for those who only want to own one master limited partnership in their portfolio it’s a great question. Since I have conducted a lot of research on both companies I decided to give my opinion on which is the better investment right now. While both are widely popular among energy and dividend investors, only one company can come out on top. Please keep in mind I'm a shareholder of both companies and I have no plans on divesting my investment in either company. My opinion on which is the better investment will be strictly based on the research I present. I will use a point system awarding one point for each area I compare. At the end of the article I will tally the points and determine which company in my opinion is a better investment today.

The devil is always in the details so let’s start the analysis off with a comprehensive analysis of the Balance Sheets and Consolidated Statement of Operations

There's an old saying that numbers never lie and being a numbers guy that’s where I always start. The balance sheet and consolidated statement of operations always can provide you with solid information when looking to make an investment. Starting with the balance sheet I'm going to compare the total assets and total liabilities of ET and EPD against each other and over the past six months from where they were to where they are. ET’s total assets for the period ending June 30, 2019, sat at $90.81 billion, which was an increase of 2.91% from Dec. 31, 2018. The cash and cash equivalents increased 6.21% to 445 million and accounts receivable increased by 8.48% to $4.35 billion. The total current assets increased by 6.64% to $7.2 billion. ET’s property plant and equipment increased 3.23% to $82.35 billion, making total assets $90.81 billion.

EPD on the other hand saw total assets increase by 3.08% from $56.97 billion to $58.72 billion. Cash and cash equivalents decreased by 68.88% to $107.3 million while their accounts receivable increased 3.51% to $3.79 billion. EPD’s property plant and equipment increased 3.49% to $40.1 billion, bringing total assets to $58.72 billion.

I give my first point to ET on total assets. ET has larger assets in all five categories which I have compared. ET’s cash and cash equivalents was 314.73% larger than EPD’s while accounts receivable was 14.82% larger. ET’s total current assets were 15% greater than EPD’s. On the property plant and equipment side ET was larger by 105.42%. The total assets for ET was 54.65% larger than EPD as there was a difference of $32.09 billion. It’s safe to say ET wins the point when comparing total assets.

(Source: Steven Fiorillo) (Data Source: ET & EPD Form 10-Q)

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(Source: EPD Form 10-Q)

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(Source: ET Form 10-Q)

Next I'm going to dissect total liabilities. ET was able to decrease total current liabilities over the past six months by 30.95%, ending Q2 with a total of $6.43 billion in current liabilities. The long-term debt increased 7.21% to $46.5 billion while other non-current liabilities decreased by 3.8% to $1.14 billion. ET’s total liabilities at the end of Q2 was $58.3 billion. EPD over the same time period reduced total current liabilities by 12.6% while long-term debt increased by 6.92% to $26.39 billion. Other long-term liabilities increased 34.74% to $1.01 billion, bringing total liabilities to $33.75 billion.

In the category for total liabilities EPD is clearly the winner. While the total current liabilities and other long-term liabilities are fairly similar. ET simply has much more long term-debt and total liabilities. ET has 76.23% more long-term debt than EPD does and 73.18% more total liabilities than EPD. I would think it’s safe to award a point to EPD as total liabilities are much lower than ET’s.

(Source: Steven Fiorillo) (Data Source: ET and EPD Form 10-Q)

The final area that I'm going to look at in this section is shareholder equity. The total equity of a company is established by subtracting the liabilities from its assets. The remaining figure is the equity of the company. ET currently has $90.8 billion in total assets and $58.8 billion in total liabilities, making the equity in ET $32.02 billion. EPD currently has $58.72 billion in total assets and $33.75 billion in total liabilities, making their total equity $24.98 billion. While ET has more than $25 billion more in total liabilities than EPD total assets exceed $32 billion more than EPD and total equity comes in just over $7 billion more than EPD. I'm going to give ET the point in this category as assets well exceed EPD’s and their total equity is 28.19% larger.

(Source: Steven Fiorillo) (Data Source: ET & EPD Q2 reports)

Property plant and equipment comparison

When comparing two companies in the same sector I always look to their property, plant and equipment line on the consolidated balance sheet. I like to see how much of their total assets it comprises. In addition to a number I also investigate what components actually make up the valuation. Per the consolidated balance sheets ET has a property, plant and equipment value of $82.35 billion. ET's four main business segments operate in natural gas, crude oil, natural gas liquids and refined products. ET provides natural gas gathering, compression, treating, transportation, storage and marketing services for natural gas, using more than 63,700 miles of pipeline, 150 Bcf of working storage capacity and more than 60 natural gas processing and treating facilities. ET’s crude oil segment operates approximately 9,500 miles of crude oil pipelines and crude oil terminals with storage capacity of approximately 38 million barrels. ET’s natural gas liquid division owns approximately 4,770 miles of NGL pipelines with transportation capacity of 2,053 MBbls/d. ET has six NGL fractionators with a capacity of 825,000 Bbls/d and NGL storage of 56 million barrels. ET also provides refined products transportation and terminalling services. The assets in this segment include 2,200 miles of refined products pipelines and approximately 35 active refined products marketing terminals which has the storage capacity of 8 million barrels.

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(Source: ET Investor Presentation)

EPD’s property plant and equipment line on their consolidated balance sheet comes in at $40.1 billion. EPD operates in five sectors which consist of pipelines, storage, natural gas processing, fractionation and import/export terminals. EPD operates 49,200 miles of pipelines which transport natural gas, NGL’s, crude oil, refined products and petrochemicals. Their storage capacity consists of 260 million barrels of NGL, crude oil and refined products. EPD has 26 natural gas processing plants and 23 NGL and propylene fractionators. EPD has four import/export facilities which include 12 deepwater ship docks which can load multiple products, four deepwater docks dedicated to crude oil and two deepwater ship docks which can load ethane.

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(Source: Enterprise Products Partners)

I must give the point to ET in the property plant and equipment category. The value placed on ET’s property, plant and equipment is just over $42 billion more than what EPD’s is worth. This is a difference of 105.42%.

Long-Term Debt

Debt can be a scary thing for many companies. While debt is a common way to raise money to expand, sometimes it can be a burden, which sucks the life out of operations. EPD’s current long term debt is $26.4 billion while ET’s long-term debt comes in at $46.5 billion. Even though ET has more equity in the company than EPD and a larger asset base I can’t take that into consideration. I'm giving EPD the point on debt levels because their debt level is just over $20 billion less than ET’s, or 76.23%.

Distributions to shareholders

Who doesn’t love a large juicy dividend or distribution? For anyone who doesn’t read my articles I love dividends and distributions. Both EPD and ET offer large distributions, but which on is better? EPD had a record level of distributable cash flow in Q2 2019 which provided a coverage level of 1.8x to the dividend. EPD has provided 21 straight years of dividend increases and 60 consecutive quarters of dividend increases. Currently EPD’s dividend is roughly 6.15%.

ET on the other hand has a larger dividend which currently sits at 9.12%. Some would say a dividend over 9% is a red flag, but when your distributable cash flow provides a coverage ratio of 2x there isn’t much to worry about. The historic data isn’t there to compare to EPD as ET is the newly formed combined entity of Energy Transfer Equity (ETE) and Energy Transfer Partners (ETP). While some like to compare historical data others, look to the future and the signs are pointing to ET being a solid income play.

I'm going to call the distributions to shareholders a tie and award both companies a half point. EPD’s historical data is phenomenal when it comes to the dividend. EPD has a solid track record with 21 years of consecutive growth and 60 consecutive quarters of increases. ET provides shareholders with a dividend which is 2.98% larger than EPD with a 2x coverage ratio from the distributable cash flow. If ET had a much lower coverage ratio I would give the full point to EPD but I'm not seeing any reason why ET can’t sustain distributions to shareholders.

Q2 2019 Financial Metrics

In Q2 ET generated $878 million in net income attributable to partners. The distributable cash flow attributable to partners was up 23% over the same time period as it came in at $1.6 billion. In Q2 2019 ET generated distribution coverage of 2x as the distributable cash flow which was in excess of distributions was $800 million. ET reported record EBITDA of $2.82 billion which was an increase of 25% from Q2 2018 and increased their outlook for adjusted EBITDA for 2019 by roughly $200 million.

EPD also had a strong Q2 as they produced a record EBITDA of $2.1 billion, which was an 18% increase from the same period in 2018. EPD's distributable cash flow was $1.7 billion which allowed EPD to retain $740 million after distributions. EPD’s coverage ratio for distributions was 1.8x.

Both companies generated record EBITDA in Q2 but ET’s numbers were superior. I'm giving the point to ET as they generated $702 million more in EBITDA with generating a larger distribution coverage ratio. Even though EPD generated $100 million more in distributable cash flow ET retained an additional $60 million after distributions.

Growth opportunities through a backlog of projects

The backlog of projects is robust for both ET and EPD. ET currently has three projects consisting of Arrowhead III, Red Bluff Express Pipeline Expansion and J.C. Nolan Diesel Pipeline ramping up in 2019. ET also has five projects which are under development which will come online between 2019 – 2021. ET’s projects focus on adding to their exporting capabilities as well as transportation from the bottlenecked Permian.

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(Source: ET Investor Presentation)

EPD has $6 billion of major capital projects under construction which will come online from now through the early 2020s. In Q3 of 2019, the Beaumont Refined Products and LPG export dock expansion will come online while shareholders can look forward to the Ethylene export dock, iBDH and the Mont Belvieu frac 10 in Q4 2019. In 2020+ EPD will be bringing online four additional projects with a potential for an additional $5 - $10 billion of opportunities on the horizon.

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(Source: EPD slideshow from CITI Midstream Energy Infrastructure Conference)

I'm going to rank the growth opportunities a draw and award both companies half a point. The reasoning is that both ET and EPD have a deep pool of projects coming online in the near future, projects under development and potential future projects. There's no way to identify how these projects will be monetized and affect the bottom line. All that can be said is both companies are investing in what they believe are growth projects that will add value to their current operations. Until these projects come online and we see the impact to operations I'm going to leave it at ET and EPD both have significant growth opportunities through their backlog of capital projects.

Conclusion

As I stated at the beginning of the article I'm a shareholder of both ET and EPD and have no intentions of selling shares of either company no matter what my research and decision shows. I believe both are quality companies which can play a significant part in any dividend portfolio. Today as it stands I would consider ET a better value than EPD and the superior investment. I compared eight categories and awarded a point to which company I felt was superior. ET won a point in total assets, shareholder equity, property, plant and equipment and Q2 2019 financial metrics. EPD won a point in total liabilities and long-term debt. I called distributions to shareholders and growth opportunities both ties awarding half a point to each company. Based on my scoring system ET was superior 5-3.

ET v EPD Point Allocations

Category

ET

EPD

Total Assets

1

Total Liabilities

1

Shareholder Equity

1

Property Plant and Equipment

1

Long Term Debt

1

Distribution to shareholders

0.5

0.5

Q2 2019 Financial Metrics

1

Growth Opportunities

0.5

0.5

Total Points

5

3

(Source: Steven Fiorillo)

Disclosure: I am/we are long ET, EPD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Additional disclosure: Disclaimer: I am not an investment advisor or professional. This article is my own personal opinion and is not meant to be a recommendation of the purchase or sale of stock. Investors should conduct their own research before investing to see if the companies discussed in this article fits into their portfolio parameters.