Enterprise Products Partners L.P. (EPD). and Enbridge Inc. (ENB): Each Entity is Structured Quite Differently; Both are Attractive Dividend Plays in the Energy Industry
Enterprise Products Partners L.P. (NYSE: EPD) and Enbridge Inc. (NYSE and TSX: ENB) are large, integrated energy entities which have built impressive energy asset networks in North America. See Figures 1 and 2.
The assets and cash flow of each company has grown steadily — and dramatically on a cumulative basis — over many years.
At its July 1998 IPO, Enterprise’s assets totaled $715 million; today its assets exceed $60 billion. Similarly, Enbridge’s adjusted EBITDA was around $2 billion in 2008. In 2022, Enbridge management expects this key metric to reach about $12 billion.
Figure 1: Enterprise Products Partners L.P. System Map
Figure 2: Enbridge Inc. System Map
ENB and EPD Cash Flow Positive
Even more important, Enterprise’s and Enbridge’s future cash flows are highly predictable.
In 2022, about 82% of Enterprise’s gross operating margin was attributable to fees from customers; only 18% had any sensitivity to commodity prices or differentials between commodity prices.
Similarly, around 98% of Enbridge’s cash flows are contracted or are based on cost-of-service utility regulation. See Figures 3 and 4.
Figure 3: About 82% of Enterprise Products Partners L.P.’s
2021 Gross Operating Margin is Fee-Based
Figure 4: Enbridge Inc. Has Highly Contracted Cash Flows
Making Sense (or Cents) of MidStream:
Investments in pipelines, principally natural gas liquids (NGL) pipelines, represent the core assets and the chief sources of cash flow for both companies. (NGLs are valuable liquids, like ethane, propane and butane, which are separated from the gas state in a processing plant.)
Indeed, Enterprise’s NGL, crude oil and natural gas pipeline investments accounted for 51%, 20%, and 14%, respectively, of its gross operating margin in 2021.
Similarly, the NGL and natural gas pipeline business segments comprised 55% and 28% of Enbridge’s 2021 adjusted EBITDA. (Enterprise only provides a segment-by-segment breakdown based on gross operating margin. Enbridge provides detailed business unit-by-business unit EBITDA and free cash flow figures.). See Table 1.
In addition, Enbridge operates a significant regulated gas utility. It distributes natural gas to 3.9 million customers in the Ontario and Quebec provinces of Canada. In 2021, this business recorded $1.45 billion of adjusted EBITDA, equivalent to about 13% of Enbridge’s $11 billion consolidated total.
ENB vs. EPD – what’s the difference? Company Structure:
While Enbridge is structured as a traditional corporation, Enterprise is a master limited partnership (MLP), which is a unique structure that provides an investor the tax benefits of a limited partnership (LP) along with the liquidity of a common stock.
To qualify as an MLP, an entity must earn at least 90% of its income through activities related to natural resources, energy commodities, or real estate. (As an aside, Real Estate Investment Trusts, or REITs, must distribute a certain percentage of their free cash flow each quarter to maintain their tax-advantaged status; MLPs have no such distribution requirements.)
MLPs are generally considered fairly low-risk, long-term investments that provide a steady income stream for their LP investors.
MLPs, which typically carry high dividend yields owing to their investments in slow-growing, capital-intensive industries (see Figure 5), have two types of partners: a general partner and limited partners, which, in Enterprise’s case, are holders of limited partnership units that trade on the NYSE under the symbol EPD).
Figure 5: Enterprise Products Partners L.P.’s Dividend Yield
Over the Last 5 Years
Other MidStream Alternatives
Aside from Enterprise, other well-known MLPs include Cheniere Energy Partners, L.P. (NYSE: CQP; mid-stream oil and gas); Brookfield Infrastructure Partners L.P. (NYSE: BIP; utilities); and Icahn Enterprises L.P. (NASDAQ: IEP; financials).
Company Structure – Continued Differences
The most important difference between a corporation (e.g., Enbridge) and an MLP (e.g., Enterprise) is that an MLP is a pass-through entity for tax purposes.
Enterprise’s profits are not taxed at the Enterprise level; instead, holders of limited partnership units include their portion of Enterprise’s profit (or losses) on their personal tax returns. Enterprise sends out K-1 schedules so that LP unitholders know precisely their attributable profits (or losses) for each year.
The dividends, or cash distributions, an MLP investor receives are generally not tied to the firm’s income but instead are tied to the firm’s generally larger distributable cash flow (DCF), which approximates its free cash flow.
DCF, perhaps the most important cash flow measure for a capital-intensive entity, is defined as its EBITDA less interest and taxes paid and maintenance capital expenditures.
The portion of the distribution linked to the income of the MLP is immediately taxable to the investor, but the amount of the distribution in excess of that amount, is not. That portion reduces an investor’s cost basis and creates a tax liability that is deferred until the investment is sold.
For example, if an MLP holder has a cost basis of $15.00 going into a year and receives a $1.00 distribution, of which $0.60 relates to the MLP’s income in that year, the investor must pay taxes only on a $0.60 distribution; and the investor’s cost basis at the end of the year will be $14.60. (If the cost basis for a long-term holder of an MLP falls to zero, the entirety of any future distribution becomes immediately taxable.)
In contrast, Enbridge, as a traditional corporation, pays corporate taxes on its profits. Additionally, dividend distributions from these after-tax profits and cash flows to Enbridge shareholders are categorized as taxable income to shareholders. As a result, Enbridge profits are effectively subject to a double layer of taxation.
Of course, limited partnerships do have drawbacks. Enterprise’s general partner, Enterprise Products Holdings LLC, has no liability protection or limit, but holders of Enterprise limited partnership units face potential liability only equal to the amount they have invested in the LP.
Enterprise’s general partner has complete control over the assets and management responsibilities at the LP; LP unitholders have very little say in how the business is run. For example, while corporations like Enbridge are required to hold annual shareholder meetings, Enterprise has no such requirement, and holds no such gathering.
Size Matters – ENB vs. EPD:
In terms of enterprise value (EV), Enbridge is nearly twice the size of Enterprise ($143 billion versus $80 billion).
However, in 2021, both companies generated about the same magnitude of distributable cash flow (DCF): $7.85 billion for Enbridge and $6.61 billion for Enterprise. DCF represents the entire pool of cash an entity can invest in growth projects or distribute to its shareholders or LP unitholders.
Enterprise is more attractively valued than Enbridge on three chief valuation metrics. First, Enterprise trades at a price-to-estimated 2022 earnings per unit of 10.9x versus a 17.3x price-to-projected 2022 earnings ratio for Enbridge. (Enterprise’s 2022 earnings per unit and Enbridge’s 2022 earnings per share are based on consensus analysts’ forecast on Yahoo Finance.)
Second, Enterprise trades at a 12.1x EV-to-2021 DCF ratio, a sharp discount Enbridge’s comparable figure of 18.2x. Finally, Enterprise’s dividend yield per unit is 7.4%, more than a full percentage point higher than Enbridge’s 6.51% dividend yield.
In addition, a comparison of the differential between the two entities’ dividend yields on an after-tax basis will even more decisively favor Enterprise, as most investors are able to defer taxes on some of Enterprise’s payout for some time (see page 7).
Both Enterprise are Enbridge are rated favorably by sell-side analysts, although, of the two, Enterprise enjoys the most constructive array of recommendations. According to The Wall Street Journal, 19 analysts rate Enterprise a “Buy,” 3 an “Overweight,” and 4 a “Hold” as of February 15, 2022. Comparable figures for Enbridge are 11, 1 and 12, respectively.
EPD vs. ENB – FAQs:
Is Enterprise Products Partners L.P. a U.S. company?
Yes. Based in Houston, Texas, Enterprise is a publicly traded MLP. Its LP units trade on the NYSE under the ticker symbol “EPD.”
Is Enbridge Inc. a Canadian company?
Yes. Enbridge is incorporated in Canada; its headquarters are in Calgary, Canada. Enbridge trades under the ticker symbol “ENB” on both the Toronto Stock Exchange (TSX) and the NYSE.
How frequently do Enterprise and Enbridge declare dividends/distributions to unitholders/shareholders?
Both entities declare and make payments on a quarterly basis.
Are the dividends of Enterprise and Enbridge safe?
Yes, they appear to be quite safe. Enterprise and Enbridge have raised their dividends for 25 and 27 consecutive years, respectively. In addition, the annual dividend rates of Enterprise and Enbridge represent a reasonable 60% and 70%, respectively, of their distributable cash flows.
Historical Dividend Data
ENB Dividend Cash Flow for last 10 years
ENB Dividend Cash Flow for last 10 years