Better Buy: Enterprise Products Partners L.P. vs. Williams Partners L.P.

American energy production is booming -- and growth isn't expected to slow down anytime soon. That creates a massive growth opportunity for well-positioned midstream operators that can shuttle raw production from the field to processing centers, refineries, natural-gas power plants, industrial chemical facilities, and export terminals, with bonus points awarded for owning any part of that value chain. Two such companies are Enterprise Products Partners LP (EPD -0.31%) and Williams Partners LP (NYSE: WPZ), which boast a combined market cap of over $100 billion. While each operates across the United States, the former is focusing heavily on the Permian Basin, while the latter is going all-in on eye-popping natural gas growth in the Appalachian region. Which stock is the better buy?

The matchup

Enterprise Products Partners is a $64 billion master limited partnership (MLP) with energy assets spread across much of the United States. One of the largest MLPs on the market, the company owns 50,000 miles of pipelines, 14 billion cubic feet of natural gas storage capacity, dozens of natural gas processing facilities, and export facilities. Aside from transcontinental pipelines, the majority of the company's operational footprint is located in the Permian Basin and along the Gulf Coast. 

Image source: Getty Images.

It should be no surprise, then, that Enterprise Products Partners has concentrated the majority of its growth investments in those two all-important energy regions. It's all part of a long-term strategy to diversify operations, historically reliant on natural gas gathering and processing, and instead lean on new opportunities in American energy such as exports and natural gas liquids. Consider that in the last 12 months, 57% of gross operating income was derived from natural gas liquids, with the remainder split nearly evenly among crude oil (16%), petrochemicals (14%), and natural gas (13%).

A more diverse business mix was enabled by $4.5 billion in growth projects that came online in 2017, but the portfolio should continue to transform for the foreseeable future. Enterprise Products Partners currently has $4.9 billion in growth projects under construction and completed $800 million worth of expansion year-to-date. 

The company is superbly positioned to capitalize on what's expected to be a stepwise change in the American natural gas liquids market. Focusing specifically on growing within the Permian Basin, Enterprise Products Partners has its hands in gathering supply from the field, transporting it to refineries and industrial complexes gobbling up new feedstocks such as ethane, and then shipping the excess supply or value-upgraded products to export terminals -- several of which it owns. With the goal of funding 50% of growth capex in 2019 from retained distributable cash flow, the business could significantly boost its long-term financial flexibility, especially if expansions deliver on their earnings potential. 

Meanwhile, Williams Partners LP also has a healthy amount of growth opportunities ahead of it, but the partnership faces a little more near-term uncertainty. That's because its parent company, The Williams Companies (WMB 0.31%), has announced its intention to acquire the remaining 26% of the MLP it doesn't already own. That plan was devised to combat regulatory changes announced in mid-March that will reduce income for natural gas pipeline owners operating as master limited partnerships. While the acquisition may still make sense and proceed as planned, a new rule announced in mid-July could effectively negate the impact to earnings from the change announced four months prior.

EPD Total Return Price data by YCharts

Therefore, ideally, investors would wait for more clarity before making an investment decision on the stock one way or the other. Assuming Williams Partners LP remains a separate publicly traded company, however, there's a solid argument to make for the stock and business.

Similar to Etnerprise, Williams Partners LP is self-funding billions of dollars in growth projects ($2.6 billion to be exact). Also, similarly, the company is in a unique position to deliver growth to unitholders. That's because the Williams family of companies owns the Transco pipeline, a 1,800-mile pipeline stretching from New York to South Texas, which provides advantages no other company can boast. 

For starters, Transco is one of the two major pipelines that can shuttle natural gas from the Appalachian region (where nearly 40% of the country's gas originates) all the way to the Gulf Coast. The other is owned by Enterprise Products Partners. However, Transco is the only pipeline that can do that while also supplying natural gas across the Southeast to new natural-gas fired power plants and new industrial facilities. 

That helps to explain why Transco itself generated 22% of all revenue for Williams Partners LP in the first quarter of 2018, although a significant portion of the company's other midstream assets build off the major energy artery. And why not? Natural gas output in the Appalachian region would rank third if it were a stand-alone country (right behind Russia and the United States), and production volumes are expected to grow more in the next five years than in the last five years.

That's why the MLP is devoting nearly all of its growth capex to increasing the functionality of Transco and its offshoots. With several growth projects entering service within the next 12 months, unitholders should begin to feel those effects sooner than later.

Image source: Getty Images.

By the numbers

Both Enterprise Products Partners and Williams Partners offer above-average growth opportunities. While this investment matchup essentially pits the growth of natural gas liquids in the Permian Basin against natural gas in the Appalachian, the two are pretty evenly matched. Therefore, let's consider a handful of valuation metrics.   

Source: Yahoo! Finance, company presentations.

These two MLPs are still relatively even. However, two metrics standout in the table above: the valuation with respect to future earnings and leverage ratios. Enterprise Products Partners has the edge when it comes to forward PE, which demonstrates that Wall Street has faith in the business' ability to maximize the earnings potential of the nearly $5 billion in growth projects coming online in the near-term. That should help the company reach its target leverage ratio of 3.75x.

Meanwhile, if the merger between Williams Partners and its parent proceeds as planned, then the combined company will sport a higher leverage ratio than the MLP alone. While the combined companies could still be a buy, especially with expected natural gas growth in the Appalachia, it may take some time to clean up the balance sheet. With more of its growth projects expected to come online from the second-half of 2019 to 2022, the company's leverage ratio is something worth considering.

The better buy is...

Despite being fairly evenly matched, Enterprise Products Partners stock is the better buy in this matchup thanks to its strong near-term growth profile and relative lack of uncertainty. Pouring investments into the natural gas liquids value chain now should result in exemplary growth in the long run. While there's some risk posed by near-term pipeline bottlenecks in the Permian Basin -- and the company is attempting to do its part to alleviate those concerns in the region -- an avalanche of industrial chemical production investments coming online in the next five years will provide a bevy of additional customers for years to come. Besides, even if there are slight delays in removing product from the Permian Basin, unitholders can kick back and collect a cool 6.1% yield.