Enterprise Products Partners And Magellan Midstream Partners: 2 Best-Of-Breed MLPs For Your Consideration

Summary

• EPD and MMP remain materially undervalued at current prices, even after a solid start to 2022.
• Both have massive distributions, with EPD's yield at 7.8% and MMP's at 8.6%.
• EPD announced the acquisition of Navitas in January, giving the company access to the Midland Basin in Texas.
• EPD and MMP partnered with Intercontinental Exchange to create a WTI Oil Futures Contract, which began trading in January.

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I wrote articles in early January on Enterprise Products Partners (NYSE:EPD) and Magellan Midstream Partners (NYSE:MMP) explaining why they are my two largest positions. I haven't made any changes to the positions, but enough has happened in the last month to warrant an update on these two best of breed MLPs.

Investment Thesis

EPD and MMP remain materially undervalued, sporting yields of 7.8% and 8.6%, respectively. They have shrugged off the volatile market conditions in January for the most part, and I will be looking for opportunities to add to the positions in the next couple months. EPD announced the acquisition of Navitas Midstream, which gives them access to the Midland basin, along with a 3.3% distribution increase and increased buybacks in Q4. MMP continues to buy back units aggressively, and together with EPD and Intercontinental Exchange (ICE), they announced a US Gulf Coast futures crude oil contract.

A Bolt On Acquisition for EPD

EPD acquired Navitas Midstream for $3.25B in January. This bolt on acquisition adds 1,750 miles of pipelines to their existing footprint and gives the company access to the Midland Basin. Management expects the acquisition to close in the first quarter of 2022 and add approximately $0.20 to DCF in 2023, the first full year after the acquisition.

Navitas Acquisition (enterpriseproducts.com)

EPD also continues to return capital to unit holders in a significant way. The distribution was raised 3.3% to $0.465 per unit. I expect we will continue to see annual raises and there might be potential for more aggressive future raises with the acquisition of Navitas. EPD also bought back 5.8M units for $125M in Q4. In 2021, they repurchased a total of $200M, and have over $1.5B remaining on their current $2B buyback authorization.

MMP: Buybacks, Buybacks, Buybacks

Since the unit price became extremely dislocated due to COVID, MMP has been buying back units very aggressively. They repurchased another 1.1M units in Q4 at an average price of $47.29. For the full year, they spent $523M buying back 10.9M units. They currently have $700M of repurchases remaining on their $1.5B authorization. They have bought back over 7% of their units so far, providing a significant boost to DCF per unit and improving the distribution coverage. Management is still waiting for the sale of their independent terminals, but it sounds like they are expecting that transaction to close within the first half of 2022.

WTI Oil Futures

Not everyone pays close attention to the stock market or the oil market, but nearly everyone heard about it when oil prices went negative in 2020. There are a lot of factors behind it, but EPD and MMP decided to partner with Intercontinental Exchange to announce a US Gulf Coast futures crude oil contract. It began trading on January 24th and has averaged over 1M barrels a day in the first few days of trading.

Here is what EPD co-CEO Jim Teague had to say about the futures contract:

We're excited about what this contract means, not just for the U.S. producer but for the global oil industry. We learned the hard way in April of 2020 that the perils that come with a futures contract that doesn't have adequate physical infrastructure, the ICE Midland WTI AGC futures contract has access to 14 ship docks in the Houston area, providing significant direct access for exports.

In addition, Enterprise and Magellan's combined distribution systems offer access to approximately 150 million barrels of total crude oil storage capacity and 4.5 million barrels of refining capacity.

This futures contract might not be central to the investment thesis for owning EPD or MMP, but I have complete trust in both management teams, and they have proven to be two of the best in the industry. If they decide that it is worth it to make an investment like this, then I am content to be along for the ride.

Food For Thought

Several CEOs in the energy transportation and processing space expect continued mergers and acquisitions over the next decade. It's going to be an interesting time to be investing in the MLP space, as the current political climate has made it damn near impossible to get new pipelines in the ground, despite the fact that they are the most efficient and environmentally friendly method of transporting fossil fuels. We saw one example with EPD's recent acquisition of Navitas, but I am expecting continued waves of deals for a while.

This is purely speculation, but I wouldn't be all that surprised if EPD eventually acquires MMP. I doubt it will happen in the next year or two, but in the next five years? It's definitely a possibility in my mind. Part of this is just the coordination between the two MLPs on the futures contract, but part of it is trying to estimate what the pipeline industry will look like in ten years. I think we will continue to see larger players snap up smaller ones, especially if the asset footprint works well together.

Conclusion

Even after the solid start to the year for EPD and MMP, I am still very bullish on both MLPs. I think we will see units of EPD trading at $30 and units of MMP trading at $60 within a couple years, all while paying a hefty tax advantaged distribution. I am very excited with the quarter EPD just reported, with a healthy distribution increase, more buybacks, and a big acquisition of Navitas, giving them access to the Midland basin.

MMP continues to be a buyback machine and I expect them to hit over 10% of shares repurchased since the beginning of the authorization in 2022. The crude futures contract is an interesting piece that I will be keeping an eye on, but it's not as central to the investment thesis for EPD and MMP as the juicy yields combined with dirt cheap valuations. Investors looking for current income and a price appreciation kicker should consider EPD and/or MMP.

Note: EPD and MMP both issue K-1 forms. Investors should be aware of what this entails before purchasing units.

Disclosure: I/we have a beneficial long position in the shares of EPD, MMP either through stock ownership, options, or other derivatives. 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.