by Aaron Levitt | June 16, 2014 2:27 pm
Energy logistics and pipelines are supposed to be boring. After all, there’s nothing partially exciting about moving various energy resources from place to place. It’s uneventful, and it’s like watching paint dry. Which is why pipeline and midstream firms are humdrum, but steady dividend payers.
However, fracking and shale gas has changed that dynamic. Our newfound energy abundance has lit a fire under the previously boring and staid midstream players. New buildouts and a hefty dose of M&A is now the new normal.
And changing with the times is pipeline firm Williams Companies (WMB).
WMB recently announced a huge deal to acquire rival midstream firm Access Midstream Partners (ACMP). The deal is big and could be hugely transformative for WMB stock and its investors. This is one pipeline firm that investors shouldn’t miss out on.
For Williams Companies, the story has always been about natural gas. The firm’s major operating areas are a “who’s who” of the hottest shale fields — including the prolific Marcellus field in Pennsylvania and Ohio’s Utica. Currently, about 14% of all the natural gas produced in the nation is carried by one of its pipelines. WMB has also made natural gas liquids (NGLs) processing a major pillar of its overall business model. So when it announced that it would be buying ACMP for nearly $6 billion dollars, natural gas was once again on its mind.
If you remember, Access Midstream Partners was once owned by beleaguered E&P firm Chesapeake (CHK). However, in its bid to pay down debt, CHK sold its interest in ACMP to private equity stake holders — Global Infrastructure Partners. And like Williams Companies, ACMP’s major focus was natural gas pipeline and processing infrastructure located in North America’s shale formations.
Last year, WMB acquired a 50% stake in ACMP’s privately held general partner from Global Infrastructure. And after seeing what juicy assets Access has, Williams Companies decided that it was worth pulling the trigger.
Under the terms of the deal, WMB will gain 100% control of Access Midstream’s general partner as well as 55.1 million units of ACMP from GIP. Williams will boost its ownership in the MLP units from 23% to a little more than 50%. Williams will pay for the deal with equity, debt and cash on hand. The acquisition should close in the third quarter of this year.
Investors have a lot to like when it comes down to the deal — even beyond the 20% pop in WMB stock.
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.
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.
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