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I know it's tempting. The entire energy sector is down for the count. Then, suddenly, signs of life! It has no doubt crossed your mind before – pipeline MLP's don't actually produce oil. This sell-off in their shares is overblown. Their services will always be needed as long as we use crude oil and natural gas. Better load up on shares in these companies while the getting is good.
Not so fast.
Don't let the recent rally fool you
While the basic premise is probably sound – we are going to need these pipeline owner operators for the foreseeable future – not all energy infrastructure stocks are created equal. Case and point, there is a world of difference between a number of operators, particularly investor favorites Boardwalk Pipeline Partners, LP (BWP) and Buckeye Partners, L.P. (BPL).
One of the favorites of the shale boom, Boardwalk Pipeline Partners, was beloved by investors for its proximity to the action in Southern Texas. Who wouldn't want tons of pipelines and terminals a stones' throw away from the Mecca of Oil that is Houston? Alas, the shale boom developed in such a way as to leave Boardwalk behind – its pipelines and contracts flowed the wrong direction.
The reaction to this realization was swift. Shares fell some 45% following the company's piercing decision to slash its quarterly dividend payment 75% in early 2014. This was no small move for an infrastructure owner operator. Shares continued to languish, on in to the industrywide downturn that started in late 2014. That is until recently.
Shares in Boardwalk Pipeline Partners have rallied a respectable 33% YTD, arguably, as money has finally returned to the sector. Unfortunately, this rally seems to be merely sentimental, as Boardwalk leaves much to be desired – especially when compared to its peers.
Don't get me wrong, Boardwalk's management is making strides to right the ship and fit its asset base to current market demand. To say that Boardwalk is a sinking ship would be to greatly mischaracterize the situation.
There are simply better options out there.
Go with Buckeye
Enter Buckeye Partners, a modern energy infrastructure owner operator with roots in what was once John D. Rockefeller's Standard Oil. Not only has it raised its dividend every year for the past 13 years, but it trounces Boardwalk on numerous metrics:
Buckeye Partners, L.P.:
| Current Yield | 6.8% |
| FY 2015 Return on Equity | 11% |
| FY 2015 Return on Assets | 4.9% |
| Forward P/E | 17.8 |
Source: S&P Capital IQ
Boardwalk Pipeline Partners, LP:
| Current Yield | 2.3% |
| FY 2015 Return on Equity | 5.3% |
| FY 2015 Return on Assets |
3.2% |
| Forward P/E |
14 |
Source: S&P Capital IQ
The reader might think that there is more value to be had in units of Boardwalk Pipeline, after all -- they have a lower P/E. Unfortunately, the simple fact of the matter is that they should be selling at a valuation discount to Buckeye.
Boardwalk is in the midst of a necessary, and expensive, transformation. The locations of its assets, primarily Indiana, Kentucky, and Southern Texas just couldn't command the transportation fees necessary to generate long-term profitability -- so management had to make a decision. Continue with the status quo or make the necessary investments to guarantee long term viability. No doubt it was difficult to watch the unit price drop 50%-but it had to be done. The company is now in the midst of a $1.6 billion CapEx program designed to retrofit Boardwalk to the current marketplace, largely funded by its slashed dividend.
Buckeye Partners, on the other hand, is not only holding its own amid the worst energy industry downturn in two decades, but it is busy making offensive moves that practically guarantee further dividend growth in the years ahead. The contrast with Boardwalk is night and day as it continues to expand operations at its Corpus Christi and New York Harbor storage terminals, as well as expand its suite of offerings to include condensate and NGL logistics solutions.
Boardwalk Production Partners, albeit having made the tough but correct decision to cut its dividend in order to plow money into operations, is stuck playing defense while Buckeye continues to advance with an enviable offense.
Foolish final thoughts
Most, if not all energy infrastructure operators are going to be fine in the long run – owning pipelines is just too sweet a gig for anything otherwise to be the case. However, not all MLP's are created equal – as we have seen in comparing Boardwalk Pipeline Partners and Buckeye Partners. One offers investors a paltry 2.3% yield with the hope of a previous dividend payment restoration in the future. The other continues to expand its infrastructure footprint while simultaneously rewarding partners with a current yield of 6.6%. The choice is a no brainer.
