On Dec 24, 2013, we retained our Neutral recommendation on
North American energy firm
Williams Companies Inc.
). Our investment thesis is supported by a Zacks Rank #3 (Hold).
Why the Reiteration?
Williams Companies should be able to generate highly visible cash
flow and dividend growth over the next several years. With
Williams Companies now free from the capital constraints of a
typical exploration and production (E&P) firm, the company's
exposure to a bullish natural gas liquids (NGL) processing market
and a deep inventory of growth projects is set to unlock
significant shareholder value.
However, we remain concerned about volatile natural gas prices,
which are likely to dampen Williams Companies' near-term growth
prospects. We also believe that upside potential will remain
limited until this North American pure play energy infrastructure
company has fully reaped the benefits of the spin-off.
Tulsa, Oklahoma-based Williams Companies is a premier energy
infrastructure provider in North America. The company's core
operations include finding, producing, gathering, processing and
transportation of natural gas.
Williams Companies' midstream assets, which are less sensitive to
commodity prices, help the company to maintain a steady stream of
revenues and cash flow even if natural gas prices stay low.
Furthermore, Williams Companies is poised to benefit from the
rebound in industrial activity, which will include increased
natural gas demand in the form of natural gas liquids.
In Nov 2013, Williams Companies approved a raise in its quarterly
cash dividend to 38 cents per share ($1.52 per share annualized),
representing an increase of 4% over the previous payout. The
dividend hike not only highlights the company's commitment to
create value for shareholders but also underlines Williams
Companies' new policy - a continued 20% annual dividend growth
over the next few years.
Williams Companies, after the volatile and capital-intensive
WPX Energy Inc.
) spin-off in 2011, has transformed itself into a pure play
midstream conglomerate with operations spanning from the Canadian
oil sands to deepwater fields in the Gulf of Mexico.
However, Williams Companies' extensive natural gas exposure
raises its sensitivity to the commodity's price, which continues
to be volatile. This translates into an uncertain near- to
medium-term outlook for the company.
Additionally, we remain concerned about Williams Companies' high
debt levels, which leave it vulnerable to an extended drop in
commodity prices. As of Sep 30, 2013, Williams Companies had
long-term debt of $10.4 billion, representing a
debt-to-capitalization ratio of 68.4%.
Finally, we believe that transfer of the upstream assets
(post-split) has left Williams with a less diversified business.
As a result, the business risk profile of the reorganized
Williams Companies is weaker than that of the pre-spin-off
Stocks That Warrant a Look
While we expect Williams Companies to perform in line with its
peers and industry levels in the coming months and advice
investors to wait for a better entry point before accumulating
shares, one can look at
Harvest Natural Resources Inc.
Clayton Williams Energy Inc.
) as good buying opportunities. Both these domestic upstream
energy operators - sporting a Zacks Rank #1 (Strong Buy) - have
recorded solid growth and have the potential to rise
significantly from the current levels.
WILLIAMS(C)ENGY (CWEI): Free Stock Analysis
HARVEST NATURAL (HNR): Free Stock Analysis
WILLIAMS COS (WMB): Free Stock Analysis
WPX ENERGY INC (WPX): Free Stock Analysis
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