Kinder Morgan vs. Enterprise Products Stock: Extracting oil and natural gas from the earth is big business, but all of that work is for naught if there is no way to move product from the wellhead to processing facilities. Certainly, trucks, ships, and specially designed rail services can handle a portion of the transport, but those methods come with a variety of challenges.
Capacity is the biggest issue, followed by the amount of time it takes for these transportation methods to move product from remote production facilities. A number of fiery accidents have also highlighted the safety and environmental issues associated with moving oil, natural gas, and chemicals by road, rail, and water.
Pipelines were developed as an alternative to traditional transportation options. They are faster, safer, and more efficient than road, rail, and water-based methods, and they require less energy to operate. Companies that develop pipeline networks – and the storage facilities strategically located along the way – are referred to as “midstream” energy companies.
There are dozens of midstream companies operating in the United States. Most limit their business to transportation and storage – they don’t handle extraction or processing of raw materials. Instead, they focus on maintaining and expanding the network that currently includes more than 190,000 miles of liquid petroleum pipeline and 2.4 million miles of natural gas pipeline.
Investors know that adding energy stock to their portfolios is an important element of diversification, but the question is which one? Two of the major players in the midstream market include Kinder Morgan and Enterprise Products, and both have important strengths that are attractive for investors. Of course, they also have their weaknesses. These are the basics you need to make a smart investment decision.
Dividend Investors Love Energy Infrastructure
For investors, there is a lot to be said for investing in energy infrastructure. The biggest advantage is that midstream companies aren’t as sensitive to changes in commodity pricing as their upstream and downstream counterparts.
That means less volatility and more reliable cash flow, which typically results in high-yielding dividends. For income investors, this niche energy market is critical to a well-rounded portfolio.
Midstream energy companies make their money by operating their pipelines like a toll road. Upstream oil and gas producers project the needs of their wellheads, then they contract with midstream companies for storage and transportation.
New pipelines are installed as needed to support specific wells, and the upstream producer pays the midstream company for every barrel that moves through the pipeline network. When storage is necessary, producers pay based on the amount of space they need.
With the need for energy constantly trending up, there is every reason to believe that the infrastructure provided by midstream companies will remain critical to the US energy industry. In fact, The Interstate Natural Gas Association of America Foundation estimates that midstream companies will invest up to $800 billion by 2035 in an effort to keep up with demand.
At least half of that will go towards increasing natural gas transportation and storage capabilities, while most of the remaining amount will be dedicated to oil. Such growth means good things for investors, as it indicates midstream companies will continue to have the cash needed to pay out the dividends investors have come to rely on.
Risks Of Investing in Midstream Energy Stocks
The risks related to midstream energy investment aren’t surprising. While commodity prices don’t impact pipeline operators to the extent that they impact upstream and downstream companies, they do influence revenues long-term.
Changes in demand could also put a damper on midstream revenues. While demand is currently headed upward, there is a strong global push to transition to alternative energy sources.
This issue, along with a variety of potential political challenges that could crop up, may spell trouble for the energy industry, both short and long-term.
Finally, environmental concerns present risk for anyone investing in the energy supply chain. Major incidents like the burst pipe that led to 2010’s Kalamazoo River oil spill mean huge expense for pipeline operators – not to mention a sullied brand.
Despite these risks, investors and analysts are confident that the midstream energy sector is an important component of a diversified portfolio. In a choice between Kinder Morgan and Enterprise Products, which is the best buy?
Is Kinder Morgan Stock a Buy?
Kinder Morgan is one of the largest midstream companies in North America with a market cap of $48 billion. It has a collection of new projects lined up through 2023 which boast a combined total value of approximately $4.4 billion. Another $1 billion worth of projects are in discussion.
Kinder Morgan’s current dividend yield stands at 4.9 percent, which is impressive, but its dividend history has been a bit rocky in recent years. It had a strong record of regular increases for many years, but in 2016 the dividend dropped dramatically. Today’s payout on a dollar-for-dollar basis is still lower than pre-2016 levels.
The reason for the 2016 cut had to do with Kinder Morgan’s handling of debt – specifically, the decision to leverage large debt levels for expansion and growth.
The company has recovered quite a bit since the 2016 crisis, but a comparison of Kinder Morgan and Enterprise’s debt-to-EBITDA ratios and the ease with which each company can manage interest expense shows Enterprise to be the stronger company.
Should You Invest in Enterprise Products Stock?
Enterprise Products is even bigger than Kinder Morgan, with a market cap of $63 billion. It has more than $6 billion worth of projects lined up through 2020, and Enterprise business leaders have indicated that they expect to additional projects to expand this list.
Enterprise Products offers investors a dividend yield of approximately 6.1 percent, and dividends have gone up for 22 consecutive years. This record has made the company particularly attractive to income investors.
Kinder Morgan vs. Enterprise Products Stock: The Bottom Line
Kinder Morgan and Enterprise Products have a lot in common. Both have assets that include pipelines, storage facilities, ports, shipping capabilities, and processing plants. Both generate revenue by contracting use of their assets to upstream and downstream energy companies. This limits their exposure to volatile energy prices.
While Enterprise Products’ current dividend is higher than that of Kinder Morgan, the gap is expected to close in the near future.
Management has indicated that Kinder Morgan investors will see a 25 percent increase in dividend yield next year. That will bring Kinder Morgan in line with Enterprise Products.
Of course, nothing is guaranteed, and Kinder Morgan had promised a 10 percent increase in 2016, just months before it decreased its dividend by 75 percent.
Investors who want reliable dividend income may be better off with Enterprise Products.
From an investor’s perspective, the biggest difference between these two companies is their structure. Kinder Morgan has a standard business structure, while Enterprise Products is a master limited partnership. Such partnerships carry a variety of tax-related obligations for investors, and they can be difficult to successfully include in tax-advantaged retirement portfolios. For investors who are buying for their IRA, Kinder Morgan is a better option.
Either of these companies is a solid choice for most portfolios, though Enterprise’s reliable dividend history and careful handling of debt makes it a somewhat better buy. However, if the complexity of Enterprise Products’ tax situation is an issue for investors, Kinder Morgan is a smart second choice.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.