Enbridge (NYSE: ENB) and Plains All American Pipeline (NYSE: PAA) are two of the largest oil-focused infrastructure companies in North America. Canada's Enbridge operates the world's longest and most complex crude oil system, which transports 25% of all the oil produced in North America. Master limited partnership Plains All American, on the other hand, operates one of the largest crude oil midstream systems in North America, highlighted by a top-tier position in the Permian Basin. With the continent's oil production expected to continue growing at a healthy pace for several years, both companies should be able to keep expanding their infrastructure. That should drive their cash flows and high-yielding dividends higher.
While both Enbridge and Plains All American offer investors an intriguing blend of growth and income, they likely have room in their portfolio for only one oil-focused pipeline company. Here's a closer look at which one stands out as the better buy right now.
Image source: Getty Images.
Drilling down into their financial profiles
The first thing investors need to do when comparing two investment opportunities is take a close look at their financial profiles. Here's how these two oil pipeline giants stack up against each other:
% of Cash Flow Fee Based or Regulated
Debt to Adjusted EBITDA
Dividend Payout Ratio
Plains All American Pipeline
Data sources: Plains All American Pipeline and Enbridge.
The table shows some key differences between these two oil pipeline giants. Enbridge stands out for having a higher credit rating, which is due in large part to the greater stability of its cash flow. While Enbridge does have a higher leverage ratio, it's well within the company's target range of 4.5 to 5.0 times. Further, leverage is on track to decline below that range by 2021 as its current slate of expansion projects enter service and boost earnings.
Plains All American, on the other hand, has greater variability in its cash flow, which is why it has a lower credit rating. That's leading the company to invest in new fee-based expansion projects so that it can improve the stability of its cash flow. That growth should support the company's goal of winning credit rating upgrades to Enbridge's level.
Overall, both companies have solid financial profiles, though Enbridge has a slight edge due to its higher credit rating and steadier cash flow profile.
A look at their growth potential
Enbridge currently has 16 billion Canadian dollars' ($12.3 billion) worth of growth projects under construction. These expansions have the company on track to increase its cash flow per share 13% by 2020. That will support the company's plan to boost its dividend by another 10% next year.
Meanwhile, Enbridge estimates that it has the financial capacity to invest CA$5 billion to CA$6 billion ($3.8 billion to $4.6 billion) per year on new expansion projects after 2020. That investment level is enough to grow its cash flow per share at an annual pace of 5% to 7%, which should support similar increases in the dividend.
The smaller Plains All American currently expects to invest $1.35 billion on expansion projects this year. That has the MLP on pace to grow its cash flow per unit by 10% this year. Meanwhile, the company has several longer-term expansions underway, including two large-scale pipelines that should start up in the first half of 2021. On top of that, it has many other expansion projects under development. Because of that, Plains All American could continue growing its cash flow at a double-digit pace for the next couple of years. That easily supports the company's view that it can increase its distribution by around 5% annually for the next few years.
Image source: Getty Images.
A quick peek at the valuation
Shares of both Enbridge and Plains All American have been red hot this year. Plains All American has surged nearly 23%, while Enbridge's stock is up almost 17%. Because of that, neither is as cheap as it was to start the year. However, both still trade at enticing valuations.
Enbridge, for example, is on track to generate $3.41 per share of cash flow this year. With the Canadian pipeline giant's stock recently trading at around $36 apiece, it implies that the company sells for roughly 10.5 times cash flow. That's well below the midteens multiple at which the market typically values midstream companies. Plains All American, meanwhile, recently sold for about $24.50 per unit. With the MLP on track to produce $2.71 per unit of cash flow, it sells for roughly nine times cash flow.
Verdict: Plains All American Pipeline is the better buy right now
While Enbridge has a slightly stronger financial profile, Plains All American is working hard to get up to its level. Meanwhile, Plains All American boasts faster growth prospects and a lower valuation. Because of that, it should be able to generate higher total returns, which makes it the better buy between the two right now.
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