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If You Like Enterprise Products Partners, You Should Check Out This More Than 10%-yielding Peer
Enterprise Products Partners (NYSE: EPD) is a popular income investment, and rightly so. The master limited partnership (MLP) has increased its distribution for 26 straight years. The midstream giant currently offers a 6.5%-yielding payout that's on an extremely firm foundation.
Investors who like that big-time income stream should check out fellow MLP Delek Logistics Partners (NYSE: DKL). It has also delivered very consistent distribution growth. Meanwhile, it currently offers an even higher yield at 10.8%.
Drilling down into Delek Logistics Partners
Delek Logistics Partners is an MLP formed by refining company Delek US Holdings to own, operate, and acquire energy midstream infrastructure focused on crude oil. It operates crude oil, gas, water, and refining logistics assets that support its parent and third-party customers. Those operations generate predictable earnings backed by long-term contracts with Delek, accounting for 36% of its EBITDA, and third-party customers, accounting for 64%. It has a much smaller operation than Enterprise Products Partners, one of the largest, most diversified energy midstream companies.
The smaller MLP produces plenty of cash to cover its high-yielding distribution. Its coverage ratio was 1.1 in the third quarter, which was below its 1.3 target because of the timing of its H2O Midstream acquisition, which closed late in the third quarter. Delek also received distributions from its recently closed investment in the Wink-to-Webster pipeline after the quarter ended. The company's coverage ratio has averaged more than 1.3 over the past several years. That's a comfortable level, though it's below Enterprise Products Partners' higher 1.7 coverage ratio. The larger MLP retains more cash to help fund its large backlog of organic expansion projects.
Delek Logistics also has a decent balance sheet. Its leverage ratio was 4.15 at the end of the third quarter, a solid level for an MLP. Leverage has been trending down in recent years; it was nearly 4.9 in 2022 and was down to 3.8 at the end of the second quarter. While Delek is in solid financial shape, it's no Enterprise Products Partners. The midstream giant has the strongest balance sheet in the sector, with a 3.0 leverage ratio and the top credit rating in the space.
The fuel to continue growing
Where Delek Logistics stands out is in its consistent distribution growth. The MLP has increased its payment for 47 straight quarters. It most recently raised its payout by 0.9% in October and has grown it by 5.3% over the past year. That's a little faster than Enterprise Products Partners, which has delivered 5% growth over the past year.
Delek Logistics has plenty of fuel to continue increasing its distribution. While its coverage ratio was tighter in the third quarter, that was due almost entirely to timing. As its earnings normalize, its coverage ratio should improve toward its target level.
Meanwhile, the driving factor of the recent deterioration in its financial metrics was that the MLP has made several new investments to fuel future growth:
- It bought Delek US's interest in the Wink-to-Webster pipeline, an oil pipeline joint venture backed by ExxonMobil.
- Acquired H2O Midstream for $160 million in cash. The accretive investment will enhance its midstream capabilities in the Midland Basin.
- The company made a final investment decision to build the Libby 2 gas processing plant in the Delaware basin, which should enter service in 2025 and boost its cash flow the following year. It also recently approved an acid gas injection project at Libby that it expects to complete by the middle of next year.
- The MLP recently agreed to buy Gravity Water Midstream for $285 million. The accretive acquisition should close earlier next year and complement its recent H2O midstream purchase.
These investments will add meaningful incremental cash flow over the next two years. That should give the MLP the fuel to continue increasing its distribution.
Higher risk but a higher reward
Delek Logistics Partners has an excellent track record of increasing its high-yielding distribution. That steady upward trend seems likely to continue, given all the growth it has secured over the past few months. While the MLP has a higher risk profile compared to Enterprise Products Partners, it offers a much higher yield. It could be a compelling option for those seeking a higher-octane income stream and are comfortable investing in MLPs that send a Schedule K-1 Federal Tax Form each year.
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Matt DiLallo has positions in Enterprise Products Partners. The Motley Fool recommends Delek Us and Enterprise Products Partners. The Motley Fool has a disclosure policy.
