Energy Transfer LP (ET) and Kinder Morgan, Inc. (KMI) are established players in the pipeline space, operating natural gas pipelines, among others. ET owns and operates a portfolio of energy assets. It owns and operates natural gas gathering and natural gas liquid (NGL) pipelines, processing plants, and treatment and conditioning facilities. KMI is an energy infrastructure company that operates through four segments: natural gas pipelines, products pipelines, terminals, and CO2. The companies that operate NGL pipelines were negatively impacted by the COVID-19 pandemic because lockdown restrictions stifled supplies.
However, these companies are seeing rising demand this year. Indeed, according to Mordor Intelligence, the oil and gas pipeline market is expected to grow at a CAGR of more than 6% between 2021 - 2026. So, both ET and KMI should benefit.
But while ET has gained 79.4% over the past nine months, KMI has returned 42.2%. And in terms of their past three months’ performance, ET is a clear winner with 35% returns versus KMI’s 20%. But which of these two stocks is a better pick now? Let's find out.
Latest Movements
ET and Enable Midstream Partners, LP (ENBL) announced on April 12, 202, that the three largest unitholders of ENBL—CenterPoint Energy, Inc. (CNP) and OGE Energy Corp (OGE)—had approved the merger of ET and ENLB. Upon completion, the merger is expected to help ET expand its footprint across multiple regions and provide increased connectivity for its natural gas and NGL transportation businesses.
On June 1, 2021, KMI agreed to acquire Stagecoach Gas Services LLC, which consists of four natural gas storage facilities with a total FERC-certificated working gas capacity of 41 billion cubic feet, and 185 miles of natural gas pipelines. The company’s president of interstate natural gas pipelines, Kimberly S. Watson explained that “These natural gas pipelines and storage facilities help connect natural gas supply sources and Northeast demand areas.”
Recent Financial Results
ET’s revenue for the first quarter, ended March 31, 2021, came in at $17 billion, up 46.2% from the prior-year quarter. The company’s net income was $3.64 billion compared to a $964 million loss in the year-ago period. Its EPS was $1.21 versus a $0.32 loss per share in the prior-year period.
For its fiscal first quarter, ended March 31, 2021, KMI’s revenue was $5.21 billion, which represents a 67.8% increase from the prior-year quarter. The company’s net income for the quarter was $1.41 billion compared to a $306 million loss in the year-ago period. Its adjusted EPS increased 150% year-over-year to $0.60.
Past and Expected Financial Performance
ET’s revenue and EBITDA have grown at 1.2% and 22.5% CAGRs, respectively, over the past three years. The company’s annual revenue is expected to increase 61.1% in 2021. ET’s EPS is expected to increase 100% for the current quarter, ending June 30, 2021, and 891.7% in 2021.
In comparison, KMI’s revenue and EBITDA grew at CAGRs of 0.3% and 3.6%, respectively, over the past three years. Analysts expect KMI’s annual revenue to increase 19.3% in its fiscal year 2021. Its EPS is expected to increase 11.8% for the current quarter, ending June 30, 2021, and 35.2% in 2021.
Profitability
ET’s $44.32 billion trailing-12-month revenue is 3.21 times KMI’s $13.81 billion. However, KMI is more profitable, with a 54.65% gross profit margin versus ET’s 29.68%.
ET’s 13.89% and 5.57% respective ROE and ROA compare favorably with KMI’s 5.61% and 3.77%.
Valuation
In terms of forward non-GAAP PEG, KMI is currently trading at 2.23x, which is 82.8% higher than ET’s 1.22x. In terms of forward EV/EBITDA also, KMI’s 9.92x is 45% higher than ET’s 6.84x.
So, ET is the more affordable stock.
POWR Ratings
KMI and ET both have an overall B rating, which equate to a Buy in our proprietary POWR Ratings system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
KMI has a C grade for Value. This is reflected in its 9.92x forward EV/EBITDA, which is 14% higher than the 8.7x industry average. ET has an A grade for Value, which is consistent with its 6.84x forward EV/EBITDA, which is 21.4% lower than the 8.70x industry average.
KMI has a B grade for Growth, which is in sync with analysts’ expectation that its EPS and revenue will increase. But ET has an A grade for Growth, which is justified given that its revenue and EPS is expected to grow exponentially.
Of the 95 stocks in the Energy-Oil & Gas industry, ET is ranked #13 and KMI is ranked #23.
In addition to the POWR Ratings grades we’ve just highlighted, we’ve rated both ET and KMI for Momentum, Stability, Sentiment and Quality. Click here to see the additional ratings for ET. Also, get all KMI’s ratings here.
The Winner
The demand for companies operating natural gas pipelines is expected to go up, which should benefit both ET and KMI. However, we think it is wise to bet on ET given its lower valuations and massive growth potential.
Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to learn about top-rated stocks in the Energy-Oil & Gas industry.
ET shares were trading at $11.07 per share on Thursday afternoon, up $0.20 (+1.84%). Year-to-date, ET has gained 86.18%, versus a 13.79% rise in the benchmark S&P 500 index during the same period.
About the Author: Ananyo Guha Niyogi
Ananyo’s ardent interest in capital markets, wealth management, and financial regulatory issues, led him to a career as an investment analyst. His goal is to educate individual investors by making complex financial issues easy to understand.
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