Why Are Activists Targeting Williams Companies Inc?

The news came out last Friday that activists had raised their stake in Williams Companies (NYSE: WMB  ) . The activist firms of Corvex Management and Soroban Capital Partners had previously claimed a 5% position back in Dec. in hopes of pushing the large pipeline operator into consolidating the industry to spur growth.

The firms are so adamant that Williams has more potential that combined they've spent an astronomical $2.5 billion to build a near 10% position. The firms spent the previous week amassing around 1.2 million shares per day with limited impact to the stock. From a potential investor's standpoint, what strikes an interesting cord is that Williams doesn't appear to offer much value from the outside.

The company now sits with a valuation of nearly $28 billion, owns a majority position in Williams Partners, LP (NYSE: WPZ  ) , and has a major investment in Access Midstream Partners (NYSE: ACMP  ) . Williams already pays a solid 4% dividend with plans for increasing those annually. What value is left for activists to extract from the stock?

Any value left?
With a valuation of nearly $30 billion in the energy infrastructure area, it appears rather suspect that more value can be squeezed out -- especially considering Williams is only expected to report revenue of $6.8 billion for the full-year 2013 when reported on Feb. 20. Even more concerning is the forecast for earnings of $1.14 in 2014 after making $1.11 back in 2012. Sure the activist firms could suggest plans to make Williams more profitable, but the stock already trades at a lofty forward P/E of over 35.

The company continues to commit to annual dividend growth of 20% for 2014 and 2015. The forecasted dividend rate for 2015 sits at $2.11. This forecast provides a major question mark as to why activists would be on its trail.

Growth plans
Between Williams and Williams Partners, the company is loaded with capital projects to fuel growth for at least the next five years. The company is ideally positioned in most of the shale areas either via its own operations or the investment in Access Midstream Partners. A primary focus is the Bluegrass Pipeline, which will transport natural gas liquids from the Marcellus and Utica shale producing areas to petrochemical markets in the Northeast and the Gulf Coast. The project plans to provide 400,000 barrels per day of mixed natural gas liquids takeaway capacity and has an interesting partner listed below.

Besides the Bluegrass Pipeline, Williams is focusing on several Marcellus and Atlantic Gulf infrastructure projects to improve the constraints in those regions. The below slide from the third-quarter earnings presentation provides a list of the major projects in progress:

Source: Williams

Boardwalk collapse
The recent collapse of Boardwalk Pipeline Partners, LP (NYSE: BWP  ) provides a prime example of why the sector is risky at these multiples. For those not following the news, the partnership that focuses on natural gas pipelines and storage plunged nearly 50% in trading on Feb. 10 after disclosing that it slashed the quarterly cash distribution to $0.10 due to a substantial decrease in distributable cash flow.

The more troubling part for Williams is that Boardwalk Pipeline Partners just happens to be the 50% partner in the Bluegrass Pipeline.

Bottom line
Between the high valuation multiples, the promised dividend growth, and a solid list of growth projects, it is difficult to understand the reasoning for activists at Williams. If anything, the Boardwalk Pipeline Partners implosion raises a major concern of a revaluation of the stock to lower multiples. Investors need to tread lightly in this situation with what would appear to be limited upside potential and a stock that activists have already pushed higher.

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