The Future Of Energy Transfer Partners And Williams Partners: Who Is To Be The Cash Flow King?

| About: Williams Partners (WPZ)
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Summary

The growth rate and cash status for WPZ are much more optimistic than those for ETP.

Unlike ETP, WPZ is on-track for the analyst estimated time to a return to profitability.

If I were forced to choose between these two energy stocks, I would choose WPZ for its cash flow, growth rate, and return on equity.

Energy is a really big deal. No one has never not needed energy. Although it's not fashionable, energy will never fall out of fashion. Simply as it is, his is probably one of the driving mindsets for energy investments. Yet the choice of how - exactly - to invest in energy creates some real head scratching, let me tell you.

Comparing all the energy stocks in the sector is essentially impossible. Our brains evolved to be good at binary comparisons, but anything above two stocks becomes problematic. Luckily for me, I often receives requests in the form of, "Which is better, Stock X or Stock Y?"

Today, I'll be answering one such question via an investigation on a few key metrics. A reader wanted to know which of the following two stocks is the better investment:

Energy Transfer Partners (NYSE:ETP)

Williams Partners (NYSE:WPZ)

These stocks, while both in the natural gas industry are slightly different. ETP deals in natural gas midstream, in intrastate transportation, and in storage. WPZ deals in infrastructure but also handles natural gas gathering and processing, as well as inter state transportation.

They are, however, similar enough for a direct comparison. When you look at their correlations to the energy sector via the SPDR Energy Sector Select ETF (NYSEARCA:XLE), you find them moving in tandem with the sector. ETP has a .80 correlation with XLE; WPZ has a .91 correlation with XLE.

But we want to know which to invest in. So, we will be focusing on the differences here. I spent a good part of the morning running the data of these two stocks through my algorithms and other fundamental and technical code and wish to present to you what I think are the most important differences to focus on prior to an investment decision for the two stocks.

News-wise, we have little of interest, at least in terms of catalysts for significant price movements. ETP is building a new pipeline, the Dakota Access Pipeline, which has spurred protests from the local Sioux tribe. The company has all the permits and a good track record of drilling without significant environmental damage. The protests will pass, the pipeline will be built, and the stock won't be significantly affected by the protests.

WPZ's only newsworthy event is its earnings report, set for mid-February. ETP also reports around that time, but WPZ's earnings report looks to be more interesting. The stock was downgraded this week, but you probably already know my feelings on analyst upgrades and downgrades - in fact, contrarian trades against analyst opinions prior to earnings are my bread and butter. As analyst opinions are second-hand information, we should go straight to the company's numbers for data-collection.

Let's do some side-by-side comparisons. In the following figures, ETP will always be on the left; WPZ on the right. Let's start with valuation, based on future cash flow:

The market could not be any clearer about which to discount and which to set a premium on. I use the above future cash flow (FCF) model from simplywall.st only when my own discounted cash flow model fails, and that happens to be when a company is negative in FCF. Fundamental valuation analyses are harder to interpret when a company.

While keeping these valuations in-mind but not overly relying on them, let's look at deeper, more objective metrics. I often dip into the metrics used to build my discounted cash flow model. Two of the most useful are growth rate and cash estimates.

For ETP, we see the negative growth rate reversing:

The implication of the trend holding is positive growth. However, we see the growth rate having tapered off in the past couple years, holding steady at -10%, which is certainly not a good sign. What makes things worse is the tanking hard right after an optimistic, temporary pullback:

This average cash estimation is based on a rolling average of free cash flows. I've found it reliable as a smooth curve for replacing the often erratic true free cash flows. These two model metrics, average cash and growth rate, show that the "underpriced" conclusion of the free-cash-flow model might not be correct and that we should probably wait for the growth rate to turn upward again before claiming the stock to be underpriced.

Things look much better for WPZ. The growth rate is on-track to return to a positive value:

My cash estimate also looks good here:

The problem with a lot of FCF-based models is that they use point statistics. That is, the models only care about the metrics' raw values now, and they ignore, for the most part, the trends. Plotting the metrics can illuminate the reasoning behind extreme and often extremely wrong model valuations.

The growth rate and cash status for WPZ are much more optimistic than those of ETP. While the FCF models essentially tell us that the market is pricing ETP too low and WPZ too high, the metrics important for such valuations show the real prices of the stocks are likely in-line with the metrics' trends. WPZ is more likely to return to profitability at a faster rate than is ETP.

Is this not the most important consideration for buying an energy stock at this time? This is a discounted but unprofitable market. The goal of any purchase in this market now is to buy a stock that will bounce back soon; otherwise we would be better off just waiting and watching.

I believe our answer is that WPZ is on-track for the analyst estimated time to return to profitability. What we have discovered, however, is that the analyst estimates for ETP seem to be somewhat premature. Consider the following:

The upward slope for ETP is a little too bullish; the data don't support such a significant jump in cash flow. WPZ, on the right, seems in-line with the data. Both ETP and WPZ are expected to bounce back to profitability, but it appears WPZ is firmer on its tracks.

Finally, let's take a look at performance expectations over the next three years in respect to the industry. Again, we see WPZ the stronger stock:

In conclusion, if I were forced to choose between these two energy stocks, I would take WPZ. That said, I am not exactly an energy bull. Still, a speculative investment in WPZ over the next few months could be an interesting trade and a decent entry point for a bullish thesis on the natural gas market.

Notes:

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Note: All unlabeled figures were created by me from data pulled from Yahoo and ADVN through R. Charts with blue backgrounds are from Etrade Pro. Fundamental charts from a paid subscription at simplywall.st.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.