Williams Companies, Inc. (WMB), Williams Partners L.P. (WPZ): Betting on Hydrocarbon Infrastructure

Kinder Morgan boosted its quarterly dividend by 19.0% to $0.38 a share from $0.32 paid in the first quarter of 2012. Management has set a dividend target of $1.57 a share for 2013, 12% higher than its 2012 estimate of $1.40 a share, excluding the El Paso acquisition. Kinder Morgan expects to achieve annual dividend growth of 12.5% through 2015.

ONEOK, Inc. (NYSE:OKE) is considered a diversified energy company. At the end of 2012, ONEOK was the sole general partner and owned 43.4% of ONEOK Partners, which is engaged in the gathering, processing, storage and transportation of natural gas in the United States. In addition, ONEOK Partners owns natural gas liquids systems, connecting natural gas liquids (NGL) supply in the Mid-Continent and Rocky Mountain regions with key market centers.

ONEOK, Inc. (NYSE:OKE) Partners is expected to continue being the growth driver of ONEOK, however, ONEOK is looking to expand its internal operations with a $3 billion investment in internal operations. Meanwhile, its 2012 annual dividend of $1.27 per share was up 17.6% from 2011 dividend levels. The company plans to increase its dividend payment by 55% to 65% over 2012 levels before the end of 2015.

Which hedge funds like natural gas?

For Williams, hedge fund SAB Capital took a new position during the fourth quarter of 2012 that was worth $76 million, but the impressive part is that Williams Companies makes up over 11% of SAB’s 13F (public equity) portfolio. ONEOK had billionaire Jim Simons as its top hedge fund owner by market value, with a $46.4 million position, which happened to only make up 0.1% of its 13F portfolio.

Meanwhile, Kinder Morgan had three hedge funds with at least 7% of its portfolio invested in the stock. This includes Locust Wood (after taking a new position during the fourth quarter of 2012) with 7.89% of its 13F, King Street with 7.7% and Halcyon Asset with 7.25%.

By the numbers

From a valuation perspective, Kinder is the cheapest. Kinder trades at 2.9 times book value, while ONEOK is at 4.6 times and Williams is 5.2 times. How do the dividends stack up?

Kinder and Williams Companies pay similar dividend yields, 3.8% and 3.7%, respectively, while ONEOK is at 3%. However,it is  worth remembering that all of these companies are corporations (versus LPs), meaning they do not issue K-1s to their investors. This is a positive for investors who would do not want to complicate their tax returns. Yet, for those interested in investing directly in the LPs versus the GPs (Kinder Morgan, ONEOK and Williams Companies) here are how the dividend yields stack up.

Kinder Morgan

  • Kinder Morgan Energy Partners (KMP) – 5.9%
  • El Paso Pipeline Partners (EPB) – 5.6%

ONEOK

  • ONEOK Partners (OKS) – 5.4%

Williams Companies

  • Williams Partners (WPZ) – 6.6%

Despite the LPs paying out solid dividend yields, they generally underperform their GPs.

Don’t be fooled

Assuming the natural gas industry shows a rebound, either of the three companies above could reward investors nicely as an income and growth opportunity. What’s more is that Goldman Sachs Group, Inc. (NYSE:GS) recently raised its 2013 natural gas price forecast by 17% — its average estimate for gas prices is now $4.40 per million Btu. I think that Kinder Morgan might be the best bet given its valuation and low payout of operating cash flow at 56%.

The article Betting on Hydrocarbon Infrastructure originally appeared on Fool.com and is written by Marshall Hargrave.

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