MPLX (NYSE: MPLX) and Enterprise Product Partners (NYSE:EPD) are both intermediate K1-issuing MLPs with very stable cash flow business models. While MPLX’s yield is around 190 basis points higher than EPD’s, EPD enjoys a higher credit rating, which implies a lower risk profile.
In this article, we’ll compare the business models, balance sheets, growth potential, and valuation of these two companies side-by-side to determine which is the better buy today.
MPLX vs Enterprise Products: Business Models
MPLX has a diversified and fully integrated midstream business that includes pipelines, gathering and processing and storage assets. One of the unique aspects of MPLX’s business model is that its major customer and shareholder is Marathon Petroleum (MPC). As a result, there is a symbiotic relationship between them, where MPLX exists to serve the interests of MPC, but at the same time MPC has a vested interest in maximizing the cash flow it receives from distributions from MPLX given that it has such a large stake in the partnership. As a result, while in the past MPC has forced MPLX into less than stellar deals such as the acquisition of the Andeavor Logistics business in order to serve its own interests, at the same time MPLX unitholders have greatly benefited from extremely generous funding. distribution policy.
EPD, on the other hand, has no such relationship with any other company and management is unmistakably aligned with unitholders given that the partnership is approximately 1/3 owned by insiders. He also has a sizeable set of assets that are well diversified and proven to deliver excellent long-term results.
The MPLX and EPD businesses are quite resilient to commodity prices and economic volatility as they each posted very resilient numbers and continued growing distributions in the worst energy market conditions in history. modern during 2020 COVID-19 shutdowns and energy market crash. MPLX has actually seen its EBITDA continue to grow at a healthy pace through 2020:
Meanwhile, the EPD suffered a slight decline, but still recorded remarkably stable performance and also rebounded well in 2021 and is growing quite strongly in 2022:
While both business models are strong, EPD’s larger size, diversification, and more certain alignment make it the winner here.
MPLX vs Enterprise Products: Checkups
Both companies’ balance sheets are quite strong, with MPLX earning a BBB rating from S&P and EPD’s earnings a BBB+ rating from S&P.
MPLX has a conservative leverage ratio of 3.7x which is lower than it has been since 2017 and its debt maturity schedule is well spread out over the next decade with no year facing debt maturities well above $2 billion and 2022 only processing about $0.5 billion in maturities:
Given that their free cash flow was $4.4 billion in 2021 and is expected to be between $3.8 and $4 billion through 2026, MPLX should have little difficulty managing each of these debt maturities. , even if refinancing markets become unfavorable.
EPD’s balance sheet looks even more favorable in our opinion with a leverage ratio of 3.4x in addition to having a more diversified asset portfolio than that of MPLX. On top of that, it retains more distributable cash flow after distributions than MPLX, has nearly $4 billion in total liquidity with approximately 95% of its debt at fixed interest rates and a weighted average maturity astonishing 20.7 years on its debt. The company has no debt maturities this year and only between $875 million and $1.25 billion per year through 2026, compared to projected annual free cash flow generation of between $5.1 billion and 6.1 billion dollars over this period. As a result, EPD’s balance sheet is about as strong as it gets in this sector.
Again, while MPLX is very strong on this metric, EPD is the clear winner here.
MPLX vs Enterprise Products: Growth Potential
MPLX and EPD continue to invest in opportunistic growth projects and EPD recently announced a major acquisition which is expected to be both immediately accretive and open up many high return, low risk incremental growth investment opportunities.
MPLX is expected to grow distributable cash flow per unit at a CAGR of 4.1% through 2026, while EPD is expected to post a DCF CAGR per unit of 4.6% over the same period. So that would seem like a slight advantage for EPD, although MPLX is very close.
MPLX vs Enterprise Products: Inventory Valuation
The main advantage of MPLX over EPD is that its distribution efficiency is significantly higher and its P/DCF multiple is significantly lower. However, when we look at EV/EBITDA multiples, we see a much tighter gap in valuations.
On top of that, MPLX is not trading at a significant discount from its pre-COVID levels while the EPD still is:
This is particularly noteworthy given that the DCF per unit of MPLX was $4.52 in 2019 and is expected to be $4.61 in 2022, while the DCF of EPD per unit was $3.01 in 2019 and is expected to be $3.32 in 2022. This means that DCF-based EPD intrinsic value has increased by 10.3% over this period and yet is trading at a 14.9% discount to its level. of 2019, while the DCF intrinsic value of MPLX has only increased by 2% over this period and is trading only at a discount of 1.45% compared to its level of 2019.
Finally, EPD’s payout coverage ratio is expected to be 1.76x this year, while MPLX’s payout coverage ratio is expected to be 1.62x. Combined with its lower risk profile, the distribution of EPD is clearly much safer than that of MPLX, although both seem quite safe at the moment.
Key takeaway for investors
All in all, both companies have an attractive price here. However, we prefer EPD given that its EV/EBITDA multiple is not much higher than that of MPLX and the quality of its balance sheet and business model is significantly superior. We both rate a BUY here, but feel better about owning EPD for the long haul.