This Gas Company Spin-Off Could Bring Big Returns

Posted: Jan 15, 2012 12:01 AM

Now that Williams Companies (WMB, $28.00) has spun off WPX Energy Inc. (WPX), let's take a look at Williams to assess its value as a growth and income stock.

Williams Companies owns and operates interstate gas pipelines, runs a large-scale Midstream Canada & Olefins business, owns a substantial portion of Williams Partners L.P. (WPZ), and operates from the Gulf of Mexico to Canada.  Olefins are organic chemicals suchs as ethylene and propene.  The midstream business processes, stores, transports and markets natural gas and natural gas liquids (NGLs).

In Williams Completes Separation of E&P Business,, Jan. 3, 2012, we learn, "Williams' interstate gas pipeline and domestic midstream interests are largely held through its significant investment in Williams Partners L.P. [WPZ], one of the largest energy master limited partnerships. Williams owns the general-partner interest and a 73-percent limited-partner interest in Williams Partners."  Williams Companies' (WMB) substantial income from Williams Partners L.P. (WPZ) is passed to WMB shareholders in the form of dividends.  As WPZ grows and earns more money, much of that increased income is also passed on to WMB shareholders.

"We forecast strong dividend growth over the next several years. Assuming WMB adopts an 80-90% payout ratio (with respect to free cash flow), we forecast 22% y/y dividend growth in 2012 ($1.04/share), 15% in 2013 ($1.19/sh) and 10% ($1.31/sh) in 2014." -- Morgan Stanley Research, Jan. 5, 2012.  WMB's most recent dividend of $1.00 per share gives the stock a current yield of 3.57%

"We believe the share price will rise in absolute terms over the next 60 days," says Morgan Stanley Research, Jan. 5, 2012.  "This is because of a completed restructuring. Following separation of its E&P segment as a stand-alone company (WPX), we believe WMB shares will now re-rate as a midstream pure-play refocused as a stable, high dividend payout model benefiting from compelling general partner economics. We are confident in management’s ability to reach the high end of its 10–15% annual dividend growth target given the opportunity set at WPZ (Marcellus will be a core area), upside from Midstream Canada & Olefins (MC&O, 20+% EBITDA growth over next two years), and recent commodity trends (current fractionation margins are 50+% above guidance). Moreover, we believe WMB has the financial flexibility and inclination to remain aggressive on the M&A front, augmenting an already robust growth profile."

Williams Companies Stock Chart

Williams Companies Stock Chart by YCharts

In addition to dividend growth, look for corporate growth via new energy projects.  "Look for large portfolio of organic projects at WPZ to drive sustained WMB dividend growth, while current reinvestment in Midstream Canada & Olefins provides an unappreciated source of further long-term growth." -- Morgan Stanley Research, Jan. 5, 2012

Morgan Stanley has a price target of $35 on WMB.  "Our price target suggests 30+% one-year total return potential. WMB is one of our top picks."  The stock has been climbing in the short time since the spin-off.  Williams Companies is attractive for growth & income investors, and traders who would be happy with 25-30% total return in the coming year, given a stable or bullish stock market.

Crista Huff, Goodfellow, LLC 

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