Back to top

Analyst Blog

On Oct 7, 2013, we retained our Neutral recommendation on North American energy firm Williams Companies Inc. (WMB - Analyst Report).

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 shareholder value.

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.  

Detailed Analysis

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. (WPX - Snapshot Report) 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. (SFY - Snapshot Report) and Resolute Energy Corp. (REN - Snapshot Report) 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 current levels.

Please login to Zacks.com or register to post a comment.

New to Zacks?

Start Here

Zacks Investment Research

Close

Are you a new Zacks Member or a visitor to Zacks.com?

Top Zacks Features

My Portfolio Tracker

Is it Time to Sell?

One of the most important steps you can take today is to set up your portfolio tracker on Zacks.com. Once you do, you'll be notified of major events affecting your stocks and/or funds with daily email alerts.

More Zacks Resources

Zacks Rank Home - Evaluate your stocks and use the Zacks Rank to eliminate the losers and keep the winners.

Mutual Fund Rank Home - Evaluate your funds with the Mutual Fund Rank for both your personal and retirement funds.

Stock/Mutual Fund Screening - Find better stocks and mutual funds. The ones most likely to beat the market and provide a positive return.

My Portfolio - Track your Portfolio and find out where your stocks/mutual funds stack up with the Zacks Rank.

Zacks #1 Rank Top Movers for Zacks #1 Rank Top Movers

Company Symbol Price %Chg
UTD THERAPE… UTHR 117.83 +28.51%
TRIQUINT SE… TQNT 20.67 +6.52%
RF MICRO DE… RFMD 12.47 +6.04%
VASCO DATA… VDSI 14.77 +4.68%
BANCO DO BR… BDORY 15.53 +3.95%