In a rare move, Williams Companies (WMB) has been forecasting substantial dividend growth through 2014. Typically management teams prefer to keep dividend increases under wraps in order to 'surprise' the market with increases and generally temper expectations.
The company has one of the leading energy infrastructures in North America. It owns interests in or operates 15,000 miles of interstate gas pipelines, 1,000 miles of NGL transportation pipelines, and more than 10,000 miles of oil and gas gathering pipelines. It owns more than 70% of Williams Partners L.P. (WPZ), one of the largest diversified energy master limited partnerships.
On Tuesday, the company announced a significant investment of $2.4B in Access Midstream Partners (ACMP). Access conversely announced plans to purchase pipeline assets from Chesapeake Energy (CHK) for $2.16B. These transactions could improve the dividend potential at Williams by 2014.
For those investors not following Williams, the company has forecast the dividend growing from $1.20 in 2012 to $1.75 in 2014 or 20% growth per year. With the announcements on Tuesday, the company hinted that the purchase would provide significant drivers for future dividend growth in 2014 and beyond. Did the company just hint that the dividend could grow beyond 20% in 2014?
With the stock plunging to $31 recently, it currently trades at a forecasted dividend yield of 5.8% for 2014. Not too bad for the current low interest rate environment.
The below chart highlights the dividend increases over the last two years:
Access Midstream Investment
The company announced plans to acquire a 50% interest in the Access Midstream Partners GP and approximately 25% of the Limited Partner Units of Access Midstream Partners. The deal is valued at $2.4B with Williams purchasing an aggregate of $1.16B of newly issued Access Midstream stock along with Global Infrastructure Partners (GIP). The remaining cash will go towards purchasing $1.8B of Units directly from GIP.
The acquisition significantly increases Williams' economic opportunity in 10 major shale producing areas including increased position in the Marcellus and Utica and initial access to the Eagle Ford, Haynesville, Barnett, Permian, Granite Wash, Colony Wash, Mississippi Lime, and Niobrara.
Access Midstream Partners
After the closing of the transactions, Access Midstream will remain an independent, publicly traded MLP.
After the new Chesapeake deal, the company will have 3.9 billion cubic feet per day of processing throughput and more than 5,800 miles of gathering pipelines and 8.7M acres under long-term dedication.
The company currently yields 5.1% with an annual distribution of $1.74. It expects the new deal to be immediately accretive to distributable cash flow.
The company will pay Chesapeake $2.16B to acquire natural gas processing assets in the Eagle Ford, Utica, and Niobrara shale plays while expanding positions in the Haynesville and Marcellus shale plays.
According to the announcement the deal will create the largest gathering and processing MLP in the country based on volume and capital invested. Access will pay for the deal via up to $1.16B in new funds from Williams and GIP. Also, the company sold up to 18.4M units in a public offering at $32.15. In total, the offering will generate close to $590M in cash. In another transaction, the company sold $1.4B of senior notes to pay for the transaction and pay off other outstanding debt.
Considering the precarious financing position of Chesapeake, one might be able to assume that Access obtained these assets at favorable pricing. Access has a much improved EBITDA projection with the forecast of a nearly 65% improvement in 2014. See below chart:
Based on the additional units sold to Williams, GIP, and the public to fund this purchase, it appears as the EBITDA per unit in 2014 jumps from $4 to over $5. If correct, the deal will provide substantial value. The one catch is that the growth capital required in 2014 will more than triple. The company will likely need to raise more capital to fund that growth.
The company forecasts the transaction to allow for sustained 15% annual distribution growth.
From all appearances, Williams hit a homerun by buying into this 'forced' sale of midstream assets in growing shale areas to Access Midstream. The company appears set for sustainable long-term growth as areas such as the Eagle Ford and Marcellus are still in the growth phase.
The recent weakness in the stock price and pricing of the stock offering at $31 might provide the opportune time to purchase the growing dividends at Williams.