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Take A Hike, Says Confident Williams Companies (WMB)

Nothing hurts like unrequited love, yet jilted Romeo Energy Transfer Equity LP (ETE) remains undeterred, albeit with a bad aftertaste. The energy services provider publicly came forward to disclose a failed takeover bid for Williams Companies (WMB) after WMB executives announced their rejection from a then-unnamed suitor on June 21.

Williams Companies logoThe markets were stunned by WMB’s rebuffing, subsequently punishing ETE stock with a 5% drop, while catapulting WMB stock 26% under extremely heavy volume — more than 12 times higher than its three-month average. The question on everyone’s mind was … why?

On surface level, the proposed deal — $64 per share of WMB stock for a total of $53.1 billion — seems like a no-brainer. The offer, which included coverage of long-term debt and other liabilities, was a lifeline for Williams Companies, which holds almost $22 billion in debt on its books, a number that continues to increase over the last four quarters.

However, ETE’s bid was contingent upon WMB abandoning its acquisition of its master limited partnership (MLP) Williams Partners LP (WPZ), a move that was apparently deemed adverse to WMB executives. For companies that specialize in the extraction and production of natural resources, an MLP designation allows for attractive tax benefits.

But the bottom line for Williams Companies is the money. By giving the proverbial finger to ETE, WMB execs signaled to the markets that they believe in the core strength of their company and its plans for future growth. Any acquisition of WMB stock would certainly come at a premium, especially when it is known amongst industry experts just how valuable Williams Companies’ assets are to ETE.

If anything, WMB’s holdout potentially may attract other suitors, like Houston-based Kinder Morgan Energy Partners LP (KMP).

WMB stock, technical chart
Source: Source: JYE Financial, unless otherwise indicated

Moving forward, WMB stock is poised to continue making strides in the markets. Prior to the failed takeover bid, WMB stock has been trading inside a bullish trend channel that goes all the way back to the onset of the so-called Great Recession in 2009. The latest markets drama and the resultant 26% upswing only serves to underscore the overall outperformance that WMB stock has yielded loyal investors and should not by any means be considered a flash in the pan.

In fact, between 1984 and 2014, there have been 15 occasions when WMB stock has jumped in market value by 20% or greater on a month-over-month basis. Of these upswings, only five have resulted in WMB stock declining three months later, and most of the bearish occurrences came in the early 2000s — a period of economic and geopolitical turmoil.

If WMB stock can maintain recent momentum, it would be on pace for a 20% lift against May’s average price per share of $50.47. Statistically, this would suggest a higher than chance probability — 10 out of 15 or 66% — that by the end of September, WMB would be in a better position in the markets, with or without the help of Energy Transfer Equity.

The energy sector is a rough game but for now, the ball is in Williams Companies’ court.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.

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