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Better Buy After Q4 Results: Energy Transfer Or Magellan Midstream?

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Energy Transfer (NYSE:ET) and Magellan Midstream (NYSE:MMP) are 2 precocious output investment-grade midstream MLPs. Although MMP has a amended way grounds and a little leverage ratio, ET is larger, much diversified, and provides a importantly higher distributable rate travel yield.

In this article, we comparison them broadside by broadside aft reporting Q4 results and connection our return connected which is simply a amended bargain astatine nan moment.

Energy Transfer Vs. Magellan Midstream: Q4 Results

In 2022, Magellan Midstream Partners accrued its shipment of refined products and crude oil, and it expects this inclination to proceed successful 2023. Despite this, its Q4 nett income declined to $187M aliases $0.91/share from $244M aliases $1.14/share successful nan aforesaid 4th of nan erstwhile twelvemonth owed to a non-cash impairment complaint of $58M related to nan Double Eagle pipeline associated venture.

However, its Q4 distributable rate flow improved to $345M from $297M successful nan prior-year quarter, and free rate travel accrued to $324M from $291M successful nan aforesaid play of nan erstwhile year. Additionally, nan shipment of refined products accrued to 144.5M barrels from 142M barrels successful nan year-earlier quarter, and crude lipid shipment via its wholly-owned assets surged to 65.2M barrels from 44.3M successful nan erstwhile year.

For nan fiscal twelvemonth 2023, MMP expects to make DCF of $1.18B, which is 1.38x nan magnitude needed to salary rate distributions, and free rate travel of $1.07B, aliases $216M aft distributions. The business foresees an summation successful crude lipid proscription measurement connected its wholly-owned pipelines compared to 2022 levels, chiefly owed to nan full-year effect of higher shipments connected nan Houston distribution strategy from a caller pipeline connection. Magellan besides assumes that nan request for refined products will stay stable, and refined products shipments are expected to emergence by astir 1% compared to nan grounds yearly measurement transported successful 2022. Finally, refined products tariffs are expected to summation by an all-in mean of astir 8% connected July 1.

MMP's guidance emphasized prioritizing incremental buybacks complete accelerating distribution maturation during nan net call. Although they scheme to support their 21-year maturation streak, guidance indicated that expanding distributions successful statement pinch rate travel maturation is not a privilege for them. Management believes that repurchasing units is simply a amended usage of superior owed to nan existent undervaluation of units, deficiency of marketplace pricing in installments for nan existent precocious yield, and anticipated superior appreciation to beryllium enjoyed from buybacks.

The business besides emphasized that it expects to proceed enjoying beardown integrated maturation successful 2023. While it has reduced its superior expenditures successful caller years and only spends $100-$150 cardinal connected "expansion capital" per year, MMP still expects to turn its distributable rate travel by astir $70 cardinal successful 2023. This reflects beardown integrated maturation successful its existing assets, which is simply a opposition to midstream peers that walk aggressively connected "growth" projects but extremity up seeing small DCF per portion growth. In addition, nan business plans to summation its refined products rates by an all-in mean of astir 8% connected July 1st, which reflects nan spot and competitory positioning of its assets.

ET, meanwhile, achieved a caller grounds successful measurement crossed each halfway segments successful 2022. In Q4, nan nett income attributable to partners accrued to $1.16B from $926M successful nan aforesaid 4th of nan erstwhile year. This was accompanied by an summation successful adjusted EBITDA to $3.44B from $2.81B, chiefly owed to higher volumes crossed each halfway segments compared to nan erstwhile twelvemonth and nan acquisition of Enable Midstream. Moreover, nan distributable rate travel for nan aforesaid play was $1.91B, up from $1.6B successful nan erstwhile year.

The business reported respective different achievements successful Q4, specified arsenic a 7% year-over-year summation successful earthy state liquids fractionation volumes, mounting a caller record. Additionally, nan single-day fractionation throughput astatine Mont Belvieu exceeded 1M barrels for nan first clip successful nan partnership's history. NGL proscription volumes roseate to a grounds 2M bbl/day, up by 5% from nan aforesaid play nan erstwhile year. Furthermore, midstream throughput volumes jumped by 32%, mounting different caller record. Finally, Q4 NGL exports from nan Nederland terminal reached a caller high.

For FY 2023, guidance provided guidance for adjusted EBITDA of $12.9B-$13.3B and expects maturation superior expenditures of $1.6B-$1.8B and attraction superior spending of $725M-$775M.

During its post-earnings convention call, ET mentioned that it is taking longer than expected to make a last finance determination connected its Lake Charles LNG task owed to precocious competition. Additionally, nan business stated that it has secured 25%-30% of nan required backing to determine connected its announced Warrior pipeline successful Texas.

ET guidance made clear connected nan net telephone that it plans to prioritize indebtedness simplification and investing successful charismatic maturation projects arsenic its apical superior allocation priorities successful 2023. This implies that location whitethorn beryllium nary further distribution hikes successful 2023 but guidance signaled that it whitethorn very good summation its distribution connected an yearly ground successful nan future. Additionally, ET is considering issuing a C-Corp currency, which would let nan institution to connection nan champion of some worlds to investors by retaining taxation advantages for semipermanent unitholders and making ET units much accessible to different investors who are different averse to owning K-1 issuing securities.

Energy Transfer Vs. Magellan Midstream: Business Model

With a highly diversified portfolio of assets, ET is simply a awesome subordinate successful nan midstream sector, offering entree to each awesome U.S. proviso basins done its interstate and retention business. The partnership's endeavor worth is complete six times larger than that of MMP, which is further diversified done its earthy gas, NGLs, crude, refined products, storage, fractionator, terminal, processing, and treating assets. Additionally, ET's adjusted EBITDA is mostly fee-based, pinch only a mini percent being delicate to commodity prices, providing important rate travel stability. ET's guidance has reduced nan company's indebtedness and accrued free rate travel aft distributions by reducing superior expenditures and bringing online its maturation task pipeline, giving it a simpler and little consequence business floor plan moving forward.

While boasting a importantly smaller portfolio than ET, MMP makes up for deficiency of size pinch profitability and consistency. With its well-managed refined products midstream assets, MMP has generated awesome mean annualized returns connected invested superior of 16% complete 15 years. MMP's rate travel is mostly insulated from commodity value fluctuations, pinch 85% of its rate travel coming from fee-based contracts, providing stableness done various marketplace cycles and power manufacture conditions.

Overall, some of these companies person fantabulous business models, but ET holds an advantage owed to its larger size and scale, which should supply much semipermanent finance opportunities for maturation arsenic good arsenic little vulnerability risk. On nan different hand, MMP's assets are very precocious value and are generating comparatively capital-light beardown integrated growth. As a result, MMP is capable to turn its DCF while pouring overmuch of its retained rate travel into portion repurchases alternatively than having to prosecute a higher-risk fierce maturation finance agenda.

Energy Transfer Vs. Magellan Midstream: Balance Sheet

With investment-grade ratings from some Moody's and S&P, ET is eyeing a imaginable upgrade to BBB successful nan adjacent future. Its in installments standing has a affirmative outlook, and nan institution is committed to continued deleveraging, having already reduced its indebtedness aggressively complete nan past fewer years. Currently, ET's leverage ratio is wrong its semipermanent target, and guidance plans to further trim indebtedness successful nan future.

MMP maintains a blimpish attack to superior allocation and equilibrium expanse guidance pinch humble leverage and liquidity, and has been trading non-core assets to trim indebtedness and bargain backmost communal units. Its advantageous indebtedness maturity schedule shows nary of its semipermanent indebtedness matures anterior to 2025, pinch 83% of full nett semipermanent indebtedness maturing successful 2030 aliases later and nan mostly not maturing until 2042 aliases later, locking successful debased liking rates for galore years to travel and avoiding antagonistic impacts from rising liking rates.

Both businesses look to beryllium successful beardown financial style pinch small consequence of financial distress for nan foreseeable future.

Energy Transfer Vs. Magellan Midstream: Distribution Outlook

Looking ahead, nan existent distribution levels of some companies look unafraid and backed by coagulated equilibrium sheets. Additionally, nan guidance of some companies person expressed a desire to summation their quarterly distributions connected a yearly ground successful nan future.

Analysts task ET will turn its distribution per portion astatine a 3.3% CAGR done 2027, while MMP is expected to only make token increases complete that span (0.8% projected CAGR done 2027) arsenic it continues to prioritize portion repurchases and equilibrium expanse strength.

That said, it is worthy noting that MMP is expected to turn its DCF per portion astatine an awesome 6.3% CAGR done 2027 acknowledgment to its beardown operation of integrated maturation via tariff hikes successful its competitively positioned assets and fierce portion repurchases. Meanwhile, ET is only expected to turn its DCF per portion astatine a 1.5% CAGR complete that span.

Energy Transfer Vs. Magellan Midstream: Valuation

Both businesses besides look very attractively priced erstwhile compared pinch their ain histories. Here is simply a side-by-side comparison of them:

ET MMP
EV/EBITDA 7.81x 10.66x
EV/EBITDA (5-Yr Avg) 8.73x 11.68x
P/2023 DCF 4.87x 9.07x
Distribution Yield 9.4% 7.8%

Overall, ET appears to beryllium vastly cheaper, pinch a importantly little EV/EBITDA and P/DCF multiples on pinch a meaningfully higher distribution yield. Furthermore, it is expected to make superior distribution per portion maturation successful nan coming years. On nan different hand, MMP does person a convincingly superior way grounds and is expected to make stronger DCF per portion maturation successful nan coming years.

ChartData by YCharts

Investor Takeaway

At High Yield Investor, we person chosen to own ET alternatively of MMP fixed its superior output and importantly cheaper valuation. That said, it is difficult to spell incorrect pinch either finance astatine this constituent arsenic some connection secure and charismatic income yields. MMP brings pinch it a very charismatic operation of maturation imaginable and output alongside a proven guidance squad and business model.

Before purchasing nan units of either business, it's important to support successful mind that some rumor K1 taxation forms.

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Editor: Naga



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