Williams Could be Short-Term Trade on Energy

Posted: Nov 11, 2011 12:01 AM

Williams Companies (WMB, $31.29) is a domestic integrated natural gas company; ”an undervalued energy play that operates pipelines, processing and an exploration-and-production business” – Tap Into the Unlocked Value of Williams Cos.barrons.com, 11/03/11.

Is the company profitable? Usually, but not always. That presents a conundrum for me, because consistent annual profitability is one of my hard-and-fast investment rules.

I also don’t like recommending companies which are about to spin off stock, because I know that the vast majority of investors and their accountants have a terrible time keeping track of & allocating cost basis upon the eventual sale of the stock. (It’s not actually a complicated process, but I was a stockbroker, and received all the distressed phone calls from clients and accountants at tax time.)

That being said, Williams Companies is a leader in its field, 77% of the stock is held by institutions, and it’s worth reviewing for any growth & income stock portfolio.

Barrons.com published an excellent article about Williams Companies, and if you don’t have access to good Wall Street research, start here to learn more about Williams Companies and its stock.

Williams Companies Stock Chart

Williams Companies Stock Chart by YCharts

“Williams, with a market capitalization of roughly $18 billion, has two striking attributes. First off, it sports a rising dividend, boosted by tax-deferred pipeline profits wrapped in a master limited-partnership structure. Then there’s the pending tax-free spinoff of its E&P business to shareholders, which should unlock the value of both the E&P and pipeline businesses.” — barrons.com

“In the third quarter, Williams saw a healthy 13% increase in production driven by successes in the Bakken Shale. It also saw greater gas-pipeline volumes in the Marcellus shale and new revenue from other East Coast pipelines. Down the road, it should benefit from new oil and gas pipeline and processing contracts in the deep-water Gulf of Mexico, and pipeline expansions to meet increased power-generation demand in the Southeast.” —barrons.com

Standard & Poor’s is lukewarm on the stock, with a Hold rating and a price target of $33 as of 11/05/11. ”In our opinion, WMB possesses a significant competitive advantage in its E&P (Exploration and Production) segment by virtue of its landholdings in the Piceance Basin. WMB’s business portfolio is dominated by asset-intensive and regulatory-influenced markets, which respond to strategies that lower capital costs, in our view.” —  Standard & Poor’s Research, 11/05/11

And then there’s Morgan Stanley: “We reiterate our Overweight rating on WMB and note the stock trades at a steep discount to our net asset value of $42/sh (our target remains $38.).” — Morgan Stanley Research, 11/02/11

The stock pays a dividend of $0.80 per share, with a current yield of 2.56%. Dividends have been paid since 1974, with the last increase of 60% paid June 2011. In September 2011, Standard & Poor’s reported, “WMB plans to raise its annual dividend by 25% to $1.00 per share.  Says it plans to fully separate its exploration and production business with a tax-free spinoff to shareholders no later than Q1 2012.”

Consensus earnings per share (EPS) are projected to grow 18%, 15% and 20% in fiscal years 2011 through 2013.  The 2011 price-earnings ratio (PE) is 20.7.

Williams’ stock price briefly touched $40 after a six-year climb, then fell to $10 with the 2008 Financial Meltdown.  The stock price has been recovering somewhat steadily, with price corrections in the summers of 2010 and 2011.  

Barring unexpected corporate and stock market disruptions, look for the price to trade between $29 – $32 in the very short term, with a subsequent retracement to $39.

Crista Huff, Goodfellow, LLC