Fellow Fool Matt DiLallo recently highlighted a $272 billion investing opportunity in the energy pipeline sector, and pointed out three excellent choices for income investors to profit from America's historic oil and gas boom. I'd like to use this article to highlight Williams Companies (NYSE:WMB) and its associated MLPs, Williams Partners (NYSE:WPZ) and Access Midstream Partners (NYSE:ACMP). The goal of the article is to point out a potential special opportunity for investors to profit created by the second largest energy merger in the midstream sector this year.

Market-crushing returns: Is it too late to buy?

 WPZ Total Return Price Chart
WPZ Total Return Price data by YCharts

As this chart shows, in the last few years Williams Companies, Access Midstream Partners, and their competitors Enterprise Products Partners (NYSE:EPD) and ONEOK Partners (NYSE:OKS) have beaten the market, with only Williams Partners underperforming. However, many investors might be worried that after nearly three years without a correction (the third longest such streak in market history) that these companies are trading at frothy levels that might hurt long-term returns. 

Comparing valuations 

Company/MLP Yield Price/Distributable Cash Flow (DCF) Price/Cash Flows EV/EBITDA
Williams Partners 7.10% 11.96 7.6 17.88
Access Midstream Partners 3.90% 16.74 20.7 24
Williams Companies 3% NA 19.3 30.02
Enterprise Products Partners 3.80% 19.2 19.6 19.95
ONEOK Partners 5.30% 13.52 9.6 15.67
ONEOK Inc 3.60% NA 10.5 14.74

Sources: MLPdata.com, S&P Capital IQ, Yahoo! Finance

Several things stand out from the above table. First, on a price/DCF or price/cash flows basis, Williams Partners is trading at substantial discounts to the other MLPs, especially Access Midstream, which is 50% owned by Williams Companies, (general partner to Williams Partners and 100% owner of Access' general partner stake).

The second trend I'd like to bring to your attention is that Williams Companies, on an EV/EBITDA (enterprise value/earnings before interest, taxes, amortization, and depreciation) basis is seemingly much more expensive than Enterprise Products Partners, which is one of just five midstream MLPs that have bought out their general partners and now trade at premiums to traditional midstream MLPs. This is because MLPs without general partners don't pay incentive distribution rights, which can be as high as 50% of marginal cash flow, and can grow their distributions faster. 

However, as this next table will show, there is a good reason that Williams Companies and Access Midstream are trading at such seemingly rich valuations. 

Paying up for strong growth prospects

Company/MLP Projected 10 Year Annual Earnings Growth Projected 10 Year Annual Dividend/Distribution Growth Projected 10 Year Annual Total Return
Williams Partners 4% 4.06% 11.16%
Access Midstream Partners 17% 17.49% 21.39%
Williams Companies 14% 15.43% 18.43%
Enterprise Products Partners 7.70% 7.28% 11.08%
ONEOK Partners 8.90% 8.39% 13.69%
ONEOK Inc 8% 8.68% 12.28%
S&P 500     9.20%

Sources: Fastgraphs

I'd like to call your attention to three facts found in this table. First, all of the midstream MLPs and general partners are expected to greatly outperform the market's traditional 1873-2013 compound annual total return rate. This is due to their high yields and medium to strong dividend/distribution growth rates. 

Second, Williams Partners is expected to grow its earnings and distribution the slowest, which along with the fact that it's struggled to cover its distribution in 2013 and 2014,  explains both its market underperformance and its cheap valuation. 

Finally, Williams Companies and Access Midstream Partners are expected to be some of the best income growth stocks of the next decade, with projected long-term total returns more than double the market's historical norm. This explains their higher valuations. 

Why you should own these companies/MLPs

There are two growth catalysts that will make these two investments likely market beaters over the next decade and beyond. 

First, Williams Partners has identified the second largest potential project backlogs of any family of MLPs I've yet found, with a total of $25 billion in potential investment projects through 2019. In fact, proportionate to its size, Williams Partners' potential backlog is 69% larger than Kinder Morgan's, whose $35 billion current and potential backlog is the largest I've found.

Williams Companies Long Term Backlog

Source: Williams Partners/Companies 2nd Quarter Earnings Presentation

Finally, investors should consider owning units/shares of all three companies because of the strong future distribution growth made possible by the merger and Access Midstream's access to nearly every major shale formation in America. 

Access Midstream Buisness Model


Source: July 2014 Access Midstream Partners Investor Presentation

As this table shows, Access Midstream has long-term contracts that allow it to profit from some of the fastest growing shale formations in the country. 

Marcellus Production Boom

Source: EIA July Drilling Productivity Report

Utica Production Growth

Williams Companies plans to increase its dividend by 32% for 2015, as soon as the merger closes (management hopes by the end of 2014) and expects 15% dividend growth through 2017. Meanwhile Access Midstream (if it remains independent) is anticipating a 25% distribution increase for 2015 and 20% for 2016. 

As for the combined Williams Partners/Access Midstream (should the merger go through), management is guiding for 10%-12% distribution growth through 2017, with a coverage ratio of at least 1.1. 

That means that current and future investors can anticipate not only a generous and fast growing yield, but one that is secure as well. 

Williams Companies is trading at a deep discount

One final thing to consider is that, based on management's dividend guidance through 2017, Williams companies is deeply undervalued. For example, the 2017 dividend is guided for $2.96/share. 

Williams Companies' five year average yield is 3.3%, and applying this to the expected dividend we get a 2017 price target of $89.70, a 53% gain in just over three years. However, investors can expect $8.21 in dividends through 2017, for a total value of $97.91/share. This generates a total return of 14.63% annually through 2017, and when applying a discount rate of 9.2% (the stock market's historic total return) we see that Williams Companies has a present day fair value of $73.55. This indicates a discount (or margin of safety) of 25.2%.

Foolish takeaway

Despite seemingly rich valuations, Williams Partners,  Access Midstream Partners, and Williams Companies are solid long-term income investments. With the combined power of the merger, $29 billion in project backlog, and access to the fastest growing shale formations in America investors can expect at least a decade of market outperformance. 

Adam Galas has no position in any stocks mentioned. The Motley Fool recommends Enterprise Products Partners, Oneok, and Oneok Partners. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.