When the leaves start to fall this autumn and you reach for the thermostat, it's companies like the three master limited partnerships (MLP) we're going to discuss that keep you warm. (To learn more, see Discover Master Limited Partnerships.)
With $12.8 billion in market capitalization and over $14.7 billion in sales, Enterprise Products Partners (NYSE:EPD) is now the second largest MLP, surpassing Kinder Morgan Energy Partners (discussed next) with its acquisition of Gulf Terra in 2004. Enterprise Products has big plans to bring about $4 billion in projects online by the end of next year.
Like most MLPs, EPD distributes its cash to its limited partners, which makes it extremely difficult to build a position in cash to fund future expansion. The company has to rely on the financial markets to fund its growth plans.
The majority of Enterprise Product's assets are on the gulf coast, making it vulnerable to weather such as hurricanes. In addition, the firm faces extreme volatility in natural gas prices. Perhaps, that is why its revenue growth rate has gone from averaging 37.8% over the last three years to just over 14% last year. The company's earnings growth has averaged 43.8% over the last three years and came in at 32.6% last year.
Difficult to Understand
Rich Kinder is one of the sharpest minds in the energy business. He bought what is now Kinder Morgan Energy Partners (NYSE:KMP) from Enron in 1996. Kinder left Enron long before the trouble began there and under his guidance, KMP has seen phenomenal growth - growth that at this point will be difficult to replicate. Kinder Morgan is exceptionally well run, but with over $8.4 billion in market cap and $8.9 billion in sales, something would have to be truly huge to affect its growth rate.
The firm recently sold an interstate natural gas system to Oneck Partners (NYSE:OKE) for $300 million. Perhaps this will help fund its $2.2 billion interest joint venture with Sempra Energy (NYSE:SRE). KMP may find it easier to expand once its parent company, Kinder Morgan Inc., is privatized. The company is probably depending on the advice of Kinder Morgan Management (NYSE:KMR). If anyone understands how this company is put together, call Ripley.
Although KMP get high marks for its accountability to unit holders, its numbers have been mixed. The firm's revenue growth rate has averaged almost 25% for the past five years, but was -8.5% last year. For those same time periods, the firm's growth in earnings was 5.5%, while last year's growth was 29.1%.
Terrific Business Model
Boardwalk Pipeline Partners (NYSE:BWP), market cap of more than $3.8 billion, has a business model that is difficult to dispute. In 2005, 63% of the firm's $643 million came from "reservation fees" and the balance from transportation and storage. Reservation fees are basically call options that the customer buys and Boardwalk sells. In addition to that concept, BWP, unlike other MLPs, does not market or buy the underlying commodity, thereby insulating itself from the inherent price volatility of gas.
Boardwalk owns two pipeline systems that total over 13,400 miles primarily in the gulf states. It also owns 11 storage facilities in Indiana and Kentucky. It has several expansion projects underway that should be operational in mid- to late-2007. The major risk with BWP is that is solely dedicated to gas, no oil or any other distillates.
Boardwalk has only been public since late 2005 but so far, the numbers look good. Boardwalk Pipeline's growth in revenue last year was 8.4% while its earnings grew at a rate of 428.6% and the firm is operating on a net margin of almost 33%.
By The Numbers
These three firms have markedly different risk/reward factors:
Enterprise Products Partners has a market-cap-to-sales ratio of 0.86, trades at 21-times earnings, pays out 6.5%. The shares (units) have appreciated 20% in the past two years.
Kinder Morgan Energy Partners has a market-cap-to-sales ratio of 0.94, trades at 838-times earnings (Yes, 838!) pays out about 6.7%. The shares have returned essentially nothing in past two years.
Boardwalk Pipeline Partners has a market-cap-to-sales ratio of about 6, trades at 18-times earnings, pays out about 5.3%. Its shares have appreciated roughly 75% in the past two years.
While Boardwalk has enjoyed the highest returns over the past two years, its valuation on a market-cap-to-sales basis is quite steep in comparison to Enterprise and Kinder Morgan. Do your own due diligence on these stocks, as one of them may be able to heat up your portfolio this Fall.
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