First, the deal will create a natural gas midstream powerhouse. WMB is no slouch, but ACMP — due to its former Chesapeake master — is the largest gathering and processing MLP when looking at throughput volume. Access owns roughly 6,300 miles of natural gas gathering pipelines in fields like Barnett, Eagle Ford, Haynesville, and the Marcellus shales. Overall, roughly 3.8 billion cubic feet of natural gas and NGLs pass through its pipelines each day.
Those assets tie in beautifully with Williams Companies’ current and proposed pipeline plans, especially when you consider what else Williams has in store for ACMP.
Under a separate deal, Williams proposed merging ACMP with its own MLP subsidiary William Partners (WPZ). While that merger isn’t contingent on the deal (or even required), it will help cut administrative costs and allow the two systems to tie in more efficiently. It’ll also create one of the largest MLPS, worth about $100 billion in enterprise value.
And in order to help make it happen, WMB announced that it will “drop down” more than $600 million in assets of its NGL and petrochemical operations into WPZ. Williams Companies will become a great play on the two MLPs after this is done. As we’ve seen before, dropping down assets into MLP yields big time tax advantages and juicy dividends for shareholders.
After it’s all said and done, WMB expects that the drop down and merger will be almost immediately accreditive to its cash flows, and future dividend growth will be robust. In fact, Williams Companies announced that it will raise its third-quarter dividend by a whopping 32% as the deal goes through. Even with today’s huge gain, WMB stock will still yield a very high 3.8%. More importantly, the size of the deal will should help drive dividend growth of 15% annually from now until 2017.
Time To Buy WMB Stock
For investors, the WMB ACMP deal highlights just how important natural gas is going to be for the United States. Williams is clearly focusing on the longer term with the purchase, and it makes plenty of strategic sense for WMB stock. Ultimately, it’s an exciting deal that will make Williams “boring” in the future. That’s doing what a midstream firm is supposed to do — move energy and create hefty cash flows.
WMB stock isn’t super cheap, currently trading at forward P/E of around 39. However, you are paying a premium for growth, something which Williams Companies has recently delivered on. For the longer term, cash flows and earnings from the addition of ACMP’s assets should help drop that P/E to into the more reasonable category. The dividend growth is the icing on the cake.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.