If everything goes according to plan, Williams Companies (WMB 0.31%) as we know it will soon cease to exist. However, its pending merger with Energy Transfer Equity (ET 0.44%) is just a fresh beginning, because the company will immediately start trading as a newly named publicly traded company when it joins forces to become part of the much larger Energy Transfer family. Because of this transition, and some stiff headwinds, investors shouldn't bank on 2016 becoming a banner year for the soon-to-be-combined entity.
What Williams Companies investors can expect in 2016
After rejecting Energy Transfer Equity's initial overtures, Williams Companies finally relented last September and agreed to merge in a $37.7 billion transaction. The two companies expect that deal to close sometime in the first half of 2016. When it does, current Williams Companies investors will receive shares of newly minted stock in a company called Energy Transfer Corp as well as cash. That new entity will be akin to being a direct investor in Energy Transfer Equity aside from the fact that it will be a C-Corp for tax purposes, while Energy Transfer Equity will remain a master limited partnership.
Data source: Energy Transfer Equity investor presentation.
The transaction will significantly broaden Williams' scope and diversify its holdings from being primarily natural gas-focused to one with expanded natural gas interests as well as diversification into oil pipelines and retail gas stations. Furthermore, the company will vault its position from a mid-range energy infrastructure company to being part of a top five global energy franchise. That said, with this transition comes a lot of factors that could weigh on the stock this year.
What we could see happen in 2016
One of these factors stems from the fact that Energy Transfer Equity likes to trade assets within its affiliates. Because of this, the company might spend 2016 reshuffling its portfolio and moving assets between its MLPs. For example, Williams' affiliated MLP, Williams Partners (NYSE: WPZ), owns assets that are similar to Energy Transfer Equity's namesake MLP Energy Transfer Partners (ETP). This could lead Energy Transfer Equity to merge these two entities in 2016 or swap assets in an effort to bring both synergy and focus to each entity. In fact, the company has already identified $2 billion in annual commercial synergies from linking assets owned by Williams Partners and Energy Transfer Partners, which are detailed on the following slide:
Data source: Energy Transfer Equity investor presentation.
In addition to the inter-company asset swaps that could come in 2016, the another big thing to watch are commodity prices. Both Energy Transfer Equity and Williams Companies have some direct exposure to commodity prices through Williams Partners and Energy Transfer Partners because both have some midstream contracts that are not fee-based. As such, continued weakness in natural gas prices in particular could weigh on cash flow. That said, should oil and gas prices rebound, it would likely remove these concerns.
The last thing to watch is the credit market, given that Energy Transfer Equity is issuing upwards of $6 billion in short-term debt to acquire Williams. That debt will eventually need to be termed out over the next year or so, which could prove to be more difficult than expected should a wave of bankruptcies hit the energy sector. Especially concerning is the fact that Williams Companies and Williams Partners have a large exposure to a very troubled shale producer, which is why their credit rating agency recently downgraded both into junk territory. Suffice it to say, the company will need to keep an eye on its debt level and maturities, with the possibility that it might need to tame dividend growth in order to keep these at more manageable levels.
Investor takeaway
Last year was a wild ride for Williams investors and it won't end in 2016 even though the company will likely cease to exist in its current form. That said, 2016 will clearly be a transition year, and that may weigh on the company's stock price. Suffice it to say, investors shouldn't expect a banner year unless the uncertainties surrounding the stock are completely removed.
