Rising demand for oil and natural gas upon the resumption of economic and industrial activities and controlled supply from OPEC+ led to high energy prices last year. However, rising Western sanctions on Russian oil have significantly disrupted the oil supply and boosted its prices even higher. As OPEC+ sticks to its original plan to increase oil output by a modest amount, the surging demand is expected to drive prices higher in the upcoming months.
High oil prices should benefit midstream companies with an established network of pipelines and terminals. Investors’ interest in this space is evident from the USCF Midstream Energy Income Fund ETF’s (UMI) 9.2% gains over the past three months versus the SPDR S&P 500 Trust ETF’s (SPY) 10.3% loss.
Kinder Morgan, Inc. (KMI) and MPLX LP (MPLX) are two prominent oil and gas midstream segment players. KMI is an energy infrastructure company that operates through Natural Gas Pipelines; Products Pipelines; Terminals; and CO2 segments. It owns approximately 83,000 miles of pipelines that transport natural gas, gasoline, crude oil, carbon dioxide, and other products, and 143 terminals that store petroleum products and chemicals and handle bulk materials like coal and petroleum coke. MPLX is a diversified master limited partnership (MLP) that owns and operates midstream energy infrastructure and logistics assets and provides fuel distribution services. It also engages in the inland marine businesses comprising transportation of light products, heavy oils, crude oil, renewable fuels, chemicals, and feedstocks, and operates boats and barges, refining logistics, terminals, rail facilities, and storage caverns.
While MPLX has returned 3.2% gains year-to-date, KMI surged 20%. Which of these stocks is a better pick now? Let’s find out.
Latest Developments
On February 7, 2022, KMI received the necessary commercial commitments to construct a renewable diesel hub in Southern California. Once built, this hub will enable customers to aggregate renewable diesel batches (R99) in the Los Angeles area and move them on pipeline transportation and energy storage company SFPP, L.P. ‘s pipeline system to the high-demand markets in Colton and Mission Valley. This will create up to 20,000 barrels per day (bpd) of blended diesel throughput capacity at its truck racks, with the ability to expand in the future.
On May 2, 2022, MPLX, WhiteWater Midstream, Stonepeak Infrastructure Partners, and natural gas utility company West Texas Gas, Inc. announced their final investment decision to expand the Whistler Pipeline after having secured sufficient firm transportation agreements with shippers. Expected to be in service in September 2023, the expansion will increase the mainline capacity from 2 Bcf/d to 2.5 Bcf/d through the planned installation of three new compressor stations. This will further enhance the pipeline’s ability to provide reliable and cost-efficient residue gas transportation out of the Permian Basin, which would benefit the companies’ growing gas processing position, producers in the region, and gas customers.
Recent Financial Results
KMI’s revenues for its fiscal 2022 first quarter ended March 31, 2022, decreased 17.6% year-over-year to $4.29 billion. The company’s operating income came in at $1.02 billion, down 45.7% from the prior-year period. While its adjusted net earnings decreased 46.7% year-over-year to $732 million, its adjusted EPS fell 46.7% to $0.32. As of March 31, 2022, the company had $84 million in cash and cash equivalents.
For its fiscal 2022 first quarter ended March 31, 2022, MPLX’s total revenues and other income increased 11.6% year-over-year to $2.61 billion. The company’s income from operations came in at $1.06 billion, indicating an 8.8% year-over-year improvement. Its net income came in at $825 million, up 11.6% from the year-ago period. MPLX’s EPS came in at $0.78, indicating a 14.7% year-over-year improvement. As of March 31, 2022, the company had $42 million in cash and cash equivalents.
Past and Expected Financial Performance
Over the past three years, KMI’s EBITDA, total assets, and levered free cash flow have declined at CAGRs of 3.2%, 3.2%, and 5.2%, respectively.
KMI’s EPS is expected to decrease 13.6% year-over-year in fiscal 2022, ending December 31, 2022, and rise 2.6% in fiscal 2023. Its revenue is expected to decrease 5.5% in fiscal 2022 and increase 0.4% in fiscal 2023. Analysts expect the company’s EPS to decline at a 2.7% rate per annum over the next five years.
Over the past three years, MPLX’s EBITDA, total assets, and levered free cash flow have increased at CAGRs of 9.7%, 14.9%, and 164.1%, respectively.
Analysts expect MPLX’s EPS to grow 11.2% year-over-year in fiscal 2022, ending December 31, 2022, and 4.4% in fiscal 2023. Its revenue is expected to grow 3.1% year-over-year in fiscal 2022 and decline 0.2% in fiscal 2023. Analysts expect the company’s EPS to grow at a 3.7% rate per annum over the next five years.
Valuation
In terms of non-GAAP forward PEG, MPLX is currently trading at 3.73x, 55.4% higher than KMI’s 0.88x. In terms of forward EV/Sales, KMI’s 4.90x compares with MPLX’s 5.15x.
Profitability
KMI’s trailing-12-month revenue is almost 1.6 times MPLX’s. However, MPLX is more profitable, with a 50.7% EBITDA margin versus KMI’s 36.7%.
Furthermore, MPLX’s ROE, ROA, and ROTC of 23.8%, 6.6%, and 6.9% compare with KMI’s 3.4%, 3.3%, and 3.5%, respectively.
POWR Ratings
While MPLX has an overall B grade, which translates to Strong Buy in our proprietary POWR Ratings system, KMI has an overall C grade, equating to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.
Both KMI and MPLX have been graded an A for Momentum, consistent with their impressive price gains over the past year. KMI has gained 19.4% over the past nine months, while MPLX returned 12.2%.
KMI has been graded a B in terms of Quality, in sync with its higher-than-industry profitability ratios. KMI’s 26% trailing-12-month levered free cash flow margin is 266.8% higher than the 7.1% industry average. MPLX’s C grade for Quality reflects its lower-than-industry profit margins. MPLX has a 4.3% trailing-12-month levered free cash flow margin, 40% lower than the 7.1% industry average.
Of the 33 stocks in the A-rated MLPs - Oil & Gas industry, MPLX is ranked #7. In contrast, KMI is ranked #59 of 98 stocks in the B-rated Energy - Oil & Gas industry.
Beyond what we have stated above, our POWR Ratings system has graded MPLX and KMI for Sentiment, Value, Stability, and Growth. Get all MPLX ratings here. Also, click here to see the additional POWR Ratings for KMI.
The Winner
Rising energy prices should benefit midstream operators KMI and MPLX in the coming months. However, higher profitability makes MPLX a better buy now.
Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Ratings of Buy or Strong Buy. Click here to access the top-rated stocks in the MLPs - Oil & Gas industry, and here for those in the Energy - Oil & Gas industry.
KMI shares were trading at $19.23 per share on Monday afternoon, up $0.20 (+1.05%). Year-to-date, KMI has gained 25.00%, versus a -16.25% rise in the benchmark S&P 500 index during the same period.
About the Author: Sweta Vijayan
Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market.
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