On Sunday, Williams (WMB 1.10%), an integrated gas company focused on exploration and production, midstream gathering and processing, and interstate natural gas transportation, announced that it will acquire full control of Access Midstream Partners (NYSE: ACMP), a midstream natural-gas services provider with infrastructure assets in some of the fastest-growing oil and gas plays in the country.
Here's why the move bodes extremely well for shareholders of both Williams and Williams Partners (NYSE: WPZ), a master limited partnership majority-owned by Williams.
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Key benefits of Access acquisition
Under the terms of the deal, Williams will pay nearly $6 billion in cash to acquire a 50% general partner, or GP, interest in Access, along with 55.1 million limited partner, or LP, units in the company. That means it will own 100% of the GP and 50% of the LP interests in the company, following a 2012 transaction in which it acquired a 50% GP interest and 23% LP interest in Access.
By acquiring full control of Access Midstream, Williams will further cement its leading position in the Marcellus shale, where it owns one of the largest and most important U.S. gas pipelines -- the Transco pipeline -- and gain greater exposure to a number of fast-growing plays in which Access operates, including the Barnett, Eagle Ford, Haynesville, Niobrara, and Utica shales.
It also means that Williams is entitled to an increasing share of Access' cash flow through GP/IDR (incentive distribution rights) and LP cash distributions. As a result, Williams' cash flow per share is expected to grow sharply over the next few years, allowing the company to deliver much stronger dividend growth to its shareholders.
Once the acquisition closes, expected in the third quarter of this year, Williams plans to boost its third-quarter dividend by 32% to $0.56 per share. The company expects to deliver 15% annual dividend growth through 2017, with planned annual dividends of approximately $1.96 per share this year, $2.46 in 2015, $2.82 in 2016, and $3.25 in 2017.
The acquisition will also significantly boost Williams' fee-based revenue to more than 80% of its gross margin, providing greater stability and predictability to its business model. This is because capacity on Access' infrastructure assets -- mainly natural-gas pipelines -- is secured by 100% long-term, fixed-fee contracts. These contracts feature minimum volume requirements, which means that Access' customers have to pay a fixed fee irrespective of whether they meet a minimum threshold of natural-gas volume.
Benefits of proposed merger with Access
Williams has also proposed to merge Williams Partners with Access Midstream. If consummated, the proposed merger would create one of the largest and fastest-growing MLPs, with projected 2015 adjusted EBITDA of approximately $5 billion, according to Alan Armstrong, Williams' chief executive officer.
Assuming the deal is finalized in 2014, the merged MLP is estimated to grow its 2015 distribution by at least 25% above Access' current guidance of $2.79 per unit, and to deliver distribution growth of 10%-12% through 2017 with a strong distribution coverage estimated to be roughly 1.2 times in 2015 and at or above 1.1 times through 2017.
Investor takeaway
Williams' acquisition of Access Midestream Partners is a strong positive for shareholders of both Williams and Williams Partners, as it will allow for much stronger dividend growth and an even more stable business model. The proposed merger of Williams Partners with Access should also be a strong positive for Williams since the merged MLP would deliver industry-leading distribution growth with strong coverage and investment-grade credit, providing its general partner -- Williams -- with a fast-growing and highly visible revenue stream.
