Summary
- The Williams Companies and Enterprise Products Partners are two investment-grade midstream businesses that pay out high yields.
- Which one is a better buy at the moment?
- We compare WMB and EPD side-by-side and offer our take.
Both The Williams Companies ( WMB ) and Enterprise Products Partners L.P. ( EPD ) are investment grade midstream businesses that sport high yields of 5.1% and 7.5%, respectively.
In this article, we will compare them side by side and offer our take on which one is a better buy.
The Williams Companies Vs. Enterprise Products Partners - Business Model
WMB has a strong portfolio of midstream assets. In contrast to EPD that is more of a diversified play on midstream and includes meaningful exposure to oil, WMB is entirely focused on natural gas midstream infrastructure. Given that it fits in better with the environmentalist and clean energy agenda, natural gas is expected to see strong demand growth in the coming decades relative to oil. Furthermore, WMB is a major player in the natural gas industry, as roughly one-third of all the natural gas that is used in the United States each day moves through its infrastructure.
It has significant geographic diversification, with its portfolio spanning 14 key supply areas. On top of that, its natural gas transmission pipelines are strategically located near densely populated regions, positioning it to benefit from growth both in domestic and international demand. It also has a proven track record of generated very attractive risk-adjusted returns on organic growth projects on its pipeline network that have earned it a weighted average 18.9% return on invested capital from 2018-2021. This is track record is particularly impressive given that it includes the COVID-19 energy market collapse.
While WMB is a play on natural gas, EPD provides well-diversified exposure in terms of geographies as well as energy commodities. Another major positive of investing in EPD is that insiders own about one-third of the partnership's common equity, aligning them well with unitholders.
Both businesses have weathered past commodity price volatility well, putting up pretty stable EBITDA numbers even during times when the broader energy industry has suffered massive headwinds (such as during the COVID-19 energy price crash).
While both businesses have very strong business models that should generate robust cash flows for decades to come, we give the slight edge to EPD here, simply due to its superior diversification and greater insider alignment. WMB is a great business, but it is pretty near impossible to match the excellence of EPD's assets and management.
The Williams Companies Vs. Enterprise Products Partners - Balance Sheet
Both businesses also have solid balance sheets. EPD boasts an industry-leading BBB+ credit rating, while WMB is not far behind with a BBB credit rating.
Overall, EPD is the winner here thanks to its lower leverage ratio, superior weighted average term to debt maturity at very attractive fixed interest rates, and impressive liquidity levels. It currently boasts a 3.1x leverage ratio, which is below the 3.25x low end of its target range. It also has a whopping $4.1 billion in liquidity along with a weighted average term to maturity of 21 years.
That said, investors in WMB have very little to worry about either, with a solid leverage ratio of 3.82x and plenty of liquidity.
The Williams Companies Vs. Enterprise Products Partners - Growth Potential
Both businesses remain committed to investing in attractive growth projects without taking on much risk. Additionally, EPD has already shown a willingness to engage in immediately accretive M&A to fuel its growth efforts.
WMB is expected to grow its dividend per share at a 5.2% CAGR through 2026, whereas EPD is expected to grow its distribution per share at a 4.1% CAGR over the same time frame according to consensus analyst estimates.
On a distributable cash flow per share/unit basis, WMB is expected to generate a meager 1.2% CAGR between now and 2026 whereas EPD is expected to generate a 2.7% CAGR over the same time frame. That said, we expect both businesses to post better results. While a deep and prolonged recession would likely lead to a poor re-contracting environment and hurt both business' growth initiatives, the current environment is very bullish, especially when you factor in inflation-related contract bumps to their cash flows. As a result, we think both will generate closer to mid-single digit distributable cash flow per share/unit CAGRs over that time frame.
We give the slight edge to EPD here given that it has more growth opportunities via its diversified platform and management has demonstrated a willingness to be more aggressive in driving growth with its recent acquisition.
The Williams Companies Vs. Enterprise Products Partners - Track Record
When it comes to track record, there is really no competition here at all. EPD totally crushes WMB:
WMB Vs. EPD - Stock Valuation
On a valuation basis, EPD appears to be clearly cheaper, as its EV/EBITDA multiple is cheaper both compared to the 5-year average as well as when compared with WMB's current multiple. EPD is also much cheaper on a P/DCF basis, and its yield is a whopping 240 basis points higher.
WMB's Metrics | Current | 5-Yr. Average |
EV/EBITDA | 10.4x | 10.6x |
P/DCF | 9.4x | NA |
Dividend Yield | 5.1% | 6.2% |
EPD's Metrics | Current | 5-Yr. Average |
EV/EBITDA | 9.4x | 10.8x |
P/DCF | 7.6x | NA |
Dividend Yield | 7.5% | 7.5% |
This valuation gap is particularly remarkable given that EPD has such a superior track record and balance sheet relative to WMB.
Investor Takeaway
While both businesses are high quality in virtually every respect and well-suited to the current macroeconomic environment, EPD wins this competition hands-down. Its business model is much better diversified, and its management is much better aligned with investors. Its balance sheet is unparalleled in the sector and its track record of generating total returns for unitholders laps WMB's multiple times. Meanwhile, its growth engine is humming very well, especially compared to recent years, and its valuation is convincingly cheaper than WMB's.
That said, there are two reasons to prefer WMB over EPD:
- It is a pure play on natural gas, which is desirable for those who wish to limit or even eliminate exposure to oil and simply invest in natural gas midstream.
- It issues a 1099 tax form instead of the K1 tax form issued by EPD. While for many, this is a non-issue, for others, it is a dealbreaker. For those seeking to avoid K1s, WMB is the obvious choice between these two midstream SWANs.
Overall, however, we are personally investing in EPD instead of WMB and we rate EPD a low risk Buy at the moment and WMB a low risk Hold.
For further details see:
Better High Yield Buy: Williams Companies' 5.1% Or Enterprise Products' 7.5%?