Avoid Williams Companies

| About: Williams Companies (WMB)

Summary

Williams trades near lows as a key executive departs ETE.

Negative news swirls around a key customer in Chesapeake Energy that questions the stable cash flows from the pipeline business.

The recommendation remains to avoid the stock with the business model under pressure and no guarantees on the cash portion of the ETE deal.

After another tumultuous week, Williams Companies' (NYSE:WMB) shareholders find the stock trading close to new multi-year lows. My previous warning was that a restructuring of the cash portion of the Energy Transfer Equity (NYSE:ETE) deal was needed despite the statements from the Board of Directors.

Investors will find out more details on the financials in a week when the company and Williams Partners L.P. (NYSE:WPZ) report Q4 financials. Analysts continue to revise down earnings expectations for 2016. The question is if the company will provide any certainty to the market regarding operations or the ETE deal, making the stock worth a buy on the dip.

ETE Deal Update

The original deal offered Williams' shareholders $8.00 in cash and 1.5274 shares in a new entity called Energy Transfer Corp (ETC). If completed under these terms, the deal offers a value of $15.91. Williams only trades at $12.91, suggesting the market continues to question whether the new entity can support the $6 billion in cash required to pay off Williams' shareholders.

The big hiccup to the deal closing was the recent departure of the CFO from ETE that structured the deal. His sudden departure on Friday after the close caused Williams to plunge on Monday. While the company released that the departure of Jamie Welch had nothing to do with accounting or financial matters, the clear view is that the BOD is likely unhappy with the decision to move forward with a Williams' bid that offered so much cash for a heavily indebted firm.

The bigger problem might actually be the business of Williams' pipelines.

Pipeline Customer Woes

Though most view the pipeline business as a simple, low-risk toll collector for the energy products shipped along the pipelines. The reality is that any business is highly dependent on healthy customers willing and able to meet the original contract terms.

My original hesitation on investing in Williams was the price cut worked out with Chesapeake Energy (NYSE:CHK) back in September. The very fact that Williams had to negotiate price cuts suggested that Williams wasn't neutral on the price of commodities or the customer. The original theory was that supply/demand weren't part of the equation for pipelines.

With Chesapeake Energy having up to $2 billion in annual commitments on pipelines according to this Reuters article, Jay Hatfield of InfraCap expects Williams to take a further fee reduction. Hatfield sees a 50% reduction mandated by courts if Chesapeake files for bankruptcy. At the same time, Credit Suisse sees a roughly $400 million cut to cash flows wiping out of the cash flows generated by the deal.

When the year started, Williams forecasted adjusted EBITDA of $4.5 billion and cash available for dividends of nearly $1.9 billion. Such cuts to the cash flows would have a material impact on the prospects of Williams. Williams Partners had a forecast of cash flows of roughly $3.0 billion. A $300 million cut to cash flows is a 10% hit to those original expectations.

The bigger concern is the unknown. As with the original renegotiation with Chesapeake, the fear is that other E&P firms will want and possibly need similar fee cuts. The pipeline equation has suddenly shifted from collecting a toll for the energy product shipped in the pipeline to one of collecting fees based on what the customers can afford.

Takeaway

The question now is whether the CFO was forced out at ETE due to the cash portion of the deal or for paying up for an asset that faces a large cut to cash flows. Either way, the dust needs to settle on the potential fee cuts and reductions to cash flows before becoming bullish on Williams. The Q4 earnings release after the close on February 17 and the corresponding earnings call on February 18 are the first key steps.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.