Investors don't seem to be paying enough attention to an astonishing new reality: North American energy independence from the rest of the world is a slam dunk. The three major countries that call the continent home are increasing production of petroleum and natural gas, trading it among themselves and exporting the excess across the globe. In the United States alone, crude oil production in 2018 is expected to top 10 million barrels per day for the first time ever, while natural gas production is expected to increase 32% between 2016 and 2026. 

Few companies are better positioned to capitalize on this new reality than energy infrastructure giants Kinder Morgan (NYSE:KMI) and Williams Partners LP (NYSE:WPZ). They own thousands of miles of oil and gas pipelines that will serve as the crucial conduits moving raw products from field to processing center to coast. But if you could own only one of these stocks, which is the better buy?

Two businessmen in a game of tug of war.

Image source: Getty Images.

The matchup

Both companies reported solid third-quarter results and have built steady momentum through the first nine months of 2017. Although revenue totals have slid in each quarter this year, the two energy companies have achieved healthy levels of operating profits and net income. Both have also worked to clean up their balance sheets by reducing debt. Even though the businesses are headed in the right direction, Mr. Market is still not giving either stock the benefit of the doubt after being caught off guard during the oil price collapse of late 2014.  

KMI Total Return Price Chart

KMI Total Return Price data by YCharts.

There's an argument to be made that Mr. Market is still punishing these two energy infrastructure stocks unfairly without accounting for baked-in growth from the fee-based business models.

For instance, Kinder Morgan is poised to benefit from increasing energy production and exports in the United States and Canada. It owns the only oil-sands pipeline serving Canada's West Coast (which will roughly triple after a planned expansion), boasts the largest natural gas pipeline network on the continent, and has $12 billion in growth projects in development that could generate an additional $1.5 billion in annual adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) by 2020. 

Williams Partners LP isn't far behind. It boasts a market cap of $35 billion compared to its peer's $38 billion valuation', despite reporting just half as much revenue last year. Williams' more favorable standing among investors can be chalked up to its natural-gas-heavy strategy that centers on its most valuable asset: the Transco pipeline, which stretches from Texas to New York and operates as a regulated monopoly.

There are dozens of natural-gas-fired power plants entering service along this lucrative route, in addition to a handful of liquefied natural gas export projects and chemical manufacturing facilities. Management expects to realize $7 billion in additional business from these expansion projects by 2020 that will be capable of generating an additional $1.5 billion in annual EBITDA. Sound familiar?

Therefore, I think there's a solid case to be made that both Kinder Morgan and Williams Partners LP are attractive long-term investments. While choosing between the two isn't easy, several valuation metrics illustrate a clearer path forward: 

Metric

Kinder Morgan

Williams Partners LP

Market capitalization

$38.4 billion

$34.7 billion

Revenue, trailing 12 months

$13.5 billion

$8.0 billion

Profit margin

6.2%

17.8%

Dividend yield

2.9%

6.7%

Price to sales

2.8x

4.4x

Price to book

1.1x

1.5x

Enterprise value to EBITDA

12.5x

13.4x

Data source: Yahoo! Finance.

As you can see, Williams Partners LP earns its valuation from its ability to turn more revenue into income than Kinder Morgan. It also boasts a much higher dividend and healthier balance sheet as measured by its debt to assets ratio.

Which stock is the better buy?

This is a difficult decision that may come down to personal preference for dividends versus value. However, the more narrow focus on natural gas of Williams Partners LP, the incredible value that can be extracted from its Transco pipeline, and its efficiency in turning revenue into profits make it the better buy despite its more expensive valuation. A cleaner balance sheet also provides it with more flexibility to respond to market volatility relative to its peer.

That said, I also consider Kinder Morgan a long-term buy for much the same reason: It's uniquely positioned to capitalize on North American energy independence for decades to come. Long-term investors looking for income and growth should strongly consider both stocks.

Maxx Chatsko has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Kinder Morgan. The Motley Fool has a disclosure policy.