ETE, EPD, WMB, and KMI: Are They Prepared for Tougher Times?
WMB’s debt-to-EBITDA ratio
One of the most common metrics used in analyzing a company’s leverage is its net debt-to-EBITDA (earnings before interest, tax, depreciation, and amortization) ratio. The ratio is calculated by dividing the net debt of a company by its EBITDA. A lower ratio indicates lower risk.
Of the four companies that we are analyzing—Enterprise Products Partners (EPD), Williams Companies (WMB), Energy Transfer Equity (ETE), and Kinder Morgan (KMI)—Williams Companies has the highest net debt-to-EBITDA ratio. ETE forms 0.52% of the Guggenheim Raymond James SB-1 Equity ETF (RYJ).
A decline in EBITDAs of companies due to the challenging energy commodity price environment has resulted in a general rise in their debt-to-EBITDA ratios in the last few quarters. Williams Companies’ ratio is also inflated due to a steep fall in its 4Q15 EBITDA.
The above graph compares the net debt-to-EBITDA ratios of ETE, KMI, WMB, and EPD. Williams Companies’ (WMB) line in the above chart indicates the impact of a challenging environment on its business. Its net debt-to-EBITDA, which was hovering near 4x as late as the third quarter of 2013, rose significantly from the beginning of 2014.
EPD’s ratio had been stable
Enterprise Products Partners’ (EPD) ratio had been stable and the lowest compared to other selected peers since the start of 2011. Both ETE and KMI have net debt-to-EBITDA ratios near 8x, much higher compared to EPD’s 4.5x. WMB’s high leverage is expected to negatively impact ETE, which is in the process of acquiring it.
EPD’s total debt, debt-to-equity, and net debt-to-EBITDA ratios indicate the financial discipline of the company, which has also helped it face the challenging environment better compared to its peers.
Next, we’ll take a look at the four companies’ dividend growth over the last few quarters.
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