Enbridge (NYSE: ENB) and The Williams Companies (NYSE: WMB) are two of the largest oil and gas midstream companies in North America.
With Enbridge yielding 7.2% and Williams yielding 8.2% at the time of this writing, both companies seem like attractive options for investors who want a little more than the 2% or so average yield in the S&P 500. Let’s determine which company is better positioned to handle the current oil and gas downturn, as well as generate reliable income and returns over the long term.
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Both Enbridge and Williams reaffirmed their initial 2020 guidance despite the downturn in oil and gas prices. That’s because both companies operate on reliable contract-based cash flow that keeps them relatively insulated from commodity prices. Enbridge has over 40 sources of cash flow, of which 98% is cost-of-service, contracted, or competitive toll settlement. Williams achieved record fee-based cash flow in 2019 and followed that up in the first quarter of 2020. CEO Alan Armstrong noted that “First quarter results were in line with our expectations as strong fee-revenue and cost savings more than offset much lower commodity margins.”
In terms of spending and cost-cutting, Enbridge sold $400 million in assets in Q1 2020, is cutting costs by $300 million this year, and is reducing its spending by about $1 billion. Williams reduced capital investments in Q1 2020 by 45% compared to Q1 2019 and expects growth-related spending to be in the lower end of its original guidance of $1.1 billion to $1.3 billion.
Compared to other energy companies, the expected impact of the coronavirus pandemic on 2020 earnings and spending is relatively minor for Enbridge and Williams. This is a testament to the reliability of each company’s business even in challenging market cycles.
On the dividend side, both companies expect distributable cash flow (DCF), which is the cash flow eligible to be given to shareholders, to well exceed dividend obligations. Enbridge expects 2020 DCF to be in the range of $4.50 to $4.80, the midpoint of which is double its dividend obligation of $2.30 per share for the year. Williams expects DCF per share to be in the range of $2.50 to $2.83 for 2020, with the midpoint at about 1.7 times its dividend obligation of $1.60 per share for the year. These are impressive numbers from both companies.
From a valuation perspective, both Enbridge and Williams are certainly on the pricier side compared to their peers.
Price-to-free-cash-flow and EV-to-EBITDA are good valuation metrics to use for pipeline companies. Price-to-free-cash-flow ignores the complex accounting associated with getting to the net income number by simply taking the market capitalization of the company and dividing it by the company’s free cash flow. EV-to-EBITDA is good for debt-heavy businesses because it divides the enterprise value of the company by its earnings before interest, taxes, depreciation, and amortization to give you a valuation metric that factors in debt.
Balance sheet comparison
Enbridge and Williams both expect 2020 debt-to-adjusted-EBITDA to be in line with guidance, with Enbridge expecting 4.5 to 5 and Williams expecting 4.4. Aside from just 2020 though, Enbridge is in a better financial position than Williams.
Enbridge leads Williams with lower debt-to-capital and a lower debt-to-equity ratio, signaling that Enbridge, as a whole, is less reliant on debt than Williams. In fact, Enbridge leads the top five largest North American midstream companies with the lowest numbers in both these categories.
Although both companies are nicely positioned to weather the short-term volatility in oil and gas markets, Enbridge’s superior balance sheet gives the company a margin of error to take on more debt if it needs to, and generally positions it more favorably over the long term.
Large midstream companies with predictable cash flow like Enbridge and Williams are a good option for investors looking for a stable business. Although Williams offers a slightly higher yield, Enbridge is the better option due to its size, diverse streams of revenue, leading predictability when it comes to cash flow, and superior balance sheet.
For a market as challenging as this one, Enbridge and Williams are arguably safer investments, and offer more reliable dividends, than other oil companies.
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