Following a recent spin-off plan and strong operating results, we have upgraded natural gas producer and pipeline firm The Williams Companies Inc. (WMB) to Neutral from Underperform.
Williams Companies is an integrated energy firm that primarily finds, produces, gathers, processes and transports natural gas primarily in the Rocky Mountains, Gulf Coast, Pacific Northwest, Eastern Seaboard and the Marcellus Shale in Pennsylvania. The company divides its business into three segments: Exploration & Production, Williams Partners – that includes the company’s 84%-owned master limited partnership Williams Partners L.P. (WPZ) – and Other.
We like the company’s strong business mix, attractive growth opportunities in its low-risk upstream model and relatively stable fee-based midstream services. We also think that the just-concluded consolidation program will allow Williams to simplify its structure, pay down debt, drive growth and unlock value for shareholders. Furthermore, the company’s proposal to split into two separate entities is expected to be long-term accretive.
In the recently reported fourth quarter results, Williams Companies came up with better-than-expected numbers, reflecting strong contributions from the Williams Partners and Others business units. Earnings per share, excluding special items, came in at 44 cents, handily beating the Zacks Consensus Estimate of 26 cents and the year-ago quarter earnings of 27 cents.
However, Williams’ leveraged balance sheet and exposure to volatility in natural gas and natural gas liquids prices offset these strengths and remain key areas of concern, in our view. Additionally, we remain apprehensive that transfer of the upstream assets (post-split) will leave Williams with a less diversified business. As a result, the business risk profile of the reorganized Williams will be weaker than that of the pre-spin-off company.
As such, we expect Williams’ growth potential to be restrained with little room for meaningful upside from current levels. Our long-term Neutral recommendation is supported by a Zacks #3 Rank (short-term Hold rating).
WILLIAMS COS (WMB): Free Stock Analysis Report
WILLIAMS PTNRS (WPZ): Free Stock Analysis Report
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