On Oct 7, 2013, we retained our Neutral recommendation on
North American energy firm
Williams Companies Inc.
Why the Reiteration?
Williams Companies should be able to generate highly visible cash
flow and dividend growth over the next several years. With
Williams 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
However, we remain worried about volatile natural gas prices,
which are likely to restrict near-term growth prospects at
Williams. 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' midstream assets, which are less sensitive to commodity
prices, help the company to maintain a steady stream of revenue
and cash flow even if natural gas prices stay low. Furthermore,
Williams 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 Aug 2013, Williams approved a raise in its quarterly cash
dividend to 36.625 cents per share ($1.4650 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' new policy - a continued 20% annual dividend growth
over the next few years.
Williams, 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' 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 Jun 30, 2013, Williams had long-term debt
of more than $10.3 billion, representing a debt-to-capitalization
ratio of 70.2%.
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 is weaker than that of the pre-spin-off company.
Stocks That Warrant a Look
While we expect Williams 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
Swift Energy Co.
Resolute Energy Corp.
) as good buying opportunities. These domestic upstream energy
operators - sporting a Zacks Rank #1 (Strong Buy) - have solid
secular growth stories with potential to rise significantly from
RESOLUTE ENERGY (REN): Free Stock Analysis
SWIFT ENERGY CO (SFY): Free Stock Analysis
WILLIAMS COS (WMB): Free Stock Analysis
WPX ENERGY INC (WPX): Free Stock Analysis
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