Williams Cos. Upped to Outperform

Following the successful separation of its upstream operations via a tax-free spin-off, we have upgraded Williams Companies Inc. (WMB - Analyst Report) to Outperform from Neutral.

Tulsa, Oklahoma-based Williams is a premier energy infrastructure provider in North America. The company’s core operations include finding, producing, gathering, processing, and transportation of natural gas. Boasting of a widespread pipeline system, Williams is one of the largest domestic transporters of natural gas by volume. Its facilities – gas wells, pipelines, and midstream services – are concentrated in the Northwest, Rocky Mountains, Gulf Coast, and Eastern Seaboard.

The company divides its business into three segments: Williams Partners – that includes the company’s 73%-owned master limited partnership Williams Partners L.P. (WPZ - Snapshot Report) –, Midstream Canada & Olefins, and Other.

In December 2011, Williams completed the spin-off of its exploration and production (E&P) business into a separate, independent and publicly traded company WPX Energy Inc. (WPX - Snapshot Report).

Williams, after the WPX Energy spin-off, 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.

We believe this North American pure play energy infrastructure company will be able to generate highly visible cash flow and dividend growth over the next several years through strong operational performances by its business units.

In particular, the growth prospects for energy infrastructure all across North America remain exciting with the requirement to support producers in the growth of shale plays, especially in regions where there is a severe lack of facilities. This creates exciting opportunities for pipeline firm like Williams, as it looks to capture the economic benefit of this trend.

Additionally, with Williams now free from the capital constraints of a typical 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.

Late last year, the energy infrastructure entity raised its quarterly cash dividend to 25 cents per share ($1.00 per share annualized), representing an increase of 25.0% over the previous payout and double the dividend distributed in December 2010.

The dividend hike not only highlights Williams’ commitment to create value for shareholders but also underlines its new policy – a continued 10-15% annual dividend growth over the next few years – that requires it to pay out substantially all of the distributions it gets from its partnership, Williams Partners L.P.

All in all, we believe Williams is favorably positioned to continue accelerating revenue and earnings growth over the next few quarters.