ENBA - 3 Reasons Why Williams Companies Is A Better Buy Than Enbridge

2023-03-31 08:33:40 ET

Summary

• ENB and WMB are two investment grade midstream businesses that offer attractive dividend yields.
• Both also offer consistent dividend growth potential along with defensive business models.
• We share three reasons why we believe that WMB is a better buy than ENB right now.

Enbridge ( ENB ) and The Williams Companies ( WMB ) are two investment grade midstream businesses that offer attractive dividend yields. Both also offer consistent dividend growth potential along with defensive business models. In this article, we share three reasons why we believe that WMB is a better buy than ENB right now.

WMB Is In A Better Long-Term Position

WMB is focused on providing pipeline infrastructure to the natural gas industry, spread across four business segments:

• Northeast G&P, which includes natural gas gathering, processing (G&P) and fractionation assets located in the Marcellus & Utica Shales
• Transmission & Gulf of Mexico, which consists of U.S. interstate natural gas pipelines as well as deepwater Gulf of Mexico natural gas and crude oil services.
• West, which is made up of a diversified group of natural gas G&P businesses serving the Barnett, Eagle Ford, Haynesville, Mid-Continent, Permian, and the Rockies supply areas.
• Gas & NGL Marketing Services, involving WMB's Gas and NGL marketing services for end-users, customers, third-party NGL producers, and its equity production.

It has developed a portfolio of properties strategically situated in 14 important supply areas. Furthermore, WMB has constructed transmission pipes near areas with higher population density in order to maximize demand for its assets. As a result of its well-positioned portfolio, WMB has a plethora of profitable growth projects that it can invest in at attractive risk-adjusted rates of return.

Its asset portfolio also enjoys a mission-critical status in the U.S. natural gas supply chain given that it handles nearly one-third of U.S. natural gas production, owns and operates over 30,000 miles of pipeline across 25 states, and owns the largest and fastest growing major pipeline network (Transco) in the United States. As a result, it generates very stable cash flows from its predominantly fee-based, commodity price-resistant earnings, grows its cash flow remarkably consistently through all sorts of macro environments (it has grown its adjusted EBITDA for nine consecutive years), and enjoys an ample growth backlog (over 30 natural gas transmission opportunities currently lined up through 2030).

In contrast to WMB's focus on natural gas, ENB has significant exposure to crude, including owning and operating the longest crude oil pipeline in North America. While ENB does also have significant exposure to natural gas (the second-longest transmission network in the United States and the largest distribution business in North America) and a growing portfolio of wind and solar assets, WMB's focus on natural gas positions it better for long-term growth due to natural gas' potentially much brighter growth potential in the coming years and decades relative to oil. Natural gas has been a powerful tool to reduce U.S. CO2 emissions over the past 15 years and is only gaining steam (pun intended) as the nation and world move forward in pursuit of an ever-greener energy industry.

While ENB still has plenty of opportunities to grow its natural gas and renewables businesses, its cash flows from its oil business will likely stagnate and even decline over time, leaving its overall growth behind that of WMB's.

Moreover, WMB has a much lower payout ratio than ENB does (47.9% to 64.9%), so it has much more retained cash flow that it can invest in growth projects to position itself for greater long-term growth.

WMB Has Greater Near-Term Dividend Growth Potential

As the discussion thus far implies, WMB also has greater near-term dividend growth potential than ENB does. Analysts currently forecast that WMB will grow its dividend per share by 5.4% per year through 2027, whereas ENB is expected to only grow its dividend per share by 3.7% over that time frame.

Why is this important? In addition to signaling WMB's overall stronger growth potential, midstream businesses are often valued at least in part based on their dividend yields. Therefore, as their payout grows, their share price typically follows. As a result, this implies that WMB is likely to see greater dividend growth-driven capital appreciation than ENB in the coming half-decade.

WMB Trades At A Cheaper Valuation

Last, but not least, WMB currently trades at a cheaper valuation than ENB does. While ENB trades at a 9.6x price to distributable cash flow ratio, WMB trades at a 7.4x price to distributable cash flow ratio. Moreover, ENB trades at an 11.98x EV/EBITDA ratio, whereas WMB trades at a mere 9.32x EV/EBITDA ratio. On a historical basis, WMB is also cheaper than ENB as ENB only trades at a 4.5% discount to its historical average EV/EBITDA ratio, whereas WMB trades at an 11.1% discount to its historical average EV/EBITDA ratio. This implies 19% upside in WMB's current share price compared to only 8.4% upside in ENB's current share price.

This discrepancy is reinforced by looking at longer-term charts. WMB has slightly outperformed ENB over the past decade:

Yet it has meaningfully underperformed ENB over the past four months, indicating that its stock price has been beaten down more than ENB's has by Mr. Market on short-term fluctuations in market sentiment despite both businesses posting solid Q4 numbers and issuing decent guidance for 2023.

Investor Takeaway

While it is worth noting that ENB has greater commodity diversification, is larger, and has a one-notch higher credit rating, we still believe that WMB is the better buy right now. WMB is on firmer long-term footing given its intense focus and strong position in the growing natural gas industry. As a result, we expect it to grow cash flows per share at a more rapid pace than ENB moving forward. When combining that catalyst to total returns with WMB's expectation of growing its dividend faster than ENB and likely seeing greater valuation multiple expansion than ENB will in the coming years, WMB's total return potential is firmly stacked in its favor. Yes, ENB's current dividend yield is 80 basis points higher than WMB's is at the moment, but this slight advantage will likely prove insignificant next to the 100s of basis points of superiority that WMB is poised to enjoy in its per share cash flow and dividend growth along with valuation multiple expansion.

Finally, investors should keep in mind that - while both businesses issue 1099 tax forms - ENB is a Canadian stock whereas WMB is a U.S. stock, so investors should make necessary adjustments for currency fluctuations and potential foreign tax withholding depending on the account that the shares are held in.

While we are finding more attractive midstream opportunities elsewhere right now, we think both of these stocks are attractive buys at the moment and may decide to add WMB to our portfolio in the not-too-distant future if its stock continues to flounder relative to its underlying fundamentals.

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