Williams Partners: Strong Cash Distributions Set To Continue

Oct.22.12 | About: Williams Partners (WPZ)

By Siraj Sarwar

Williams Partners LP (WPZ) is a master limited partnership that possesses the Northwest and Transco natural gas pipelines. Williams Partners operates one of the state's largest midstream natural gas gathering and processing operations. WPZ also has a 49% interest in the Gulfstream pipeline. The collaboration of liquids leveraged midstream business and a core interstate gas transmission have help to maintain substantial cash flow growth.

The partnership pays nifty dividends, which are subject to income taxes. However, being organized as a partnership helps the company to avoid double taxation. Most corporate dividends experience double taxation. Dividends are released from profits on which a company has been taxed and are taxable yet again to stockholders. Partnerships have tax advantages, which makes them suitable for income-oriented investors.

Yield of dreams

Williams Partners has fascinating yield of 5.90%. Williams Partners plans to increase its distribution by 8 percent this year, and 9 percent midpoint raise for 2013 and 2014. WPZ looks to expand its distributions from $3.14 in 2012 to a minimum of $3.75 by 2014.

Quarterly total revenue contracted 5.3% year over a year to $1,583.0 million. Notably, Williams Partners' distributable cash flow attributable to partnership operations was $293 million at the end of Q2 of 2012. However, Williams Partners has $397 million recorded in the year ago quarter. Recently, the partnership increased its quarterly cash distribution by 8.0% year over a year to 79.25 cents per unit.

WPZ shares exhibited both eye-catching valuation metrics and solid profitability metrics. For instance, the stock is trading at a price-to-book ratio of 2.2. In addition, Williams Partners has an annual dividend yield of 5.90%. The average stock in the peer group has a yield of 4.7 percent and trades at a price to book ratio of 2.4.

To examine WPZ financial strength for future distributions, I look at earnings, cash flow, risks and future guidance. I also examine WPZ peers to see where the company stands compared to its peers

Recent Earnings

WPZ has documented Q2 of FY2012 earnings of 29 cents per unit. WPZ has noted deterioration of 68.1 percent from the last year profit level of 91 cents. Reduced natural gas liquid margins in the midstream business contributed to this decline. However, contributions from the gas pipeline and higher fee-based revenue in the midstream business partially balanced out the weakness.

Risks

Williams Partners has experienced dropping commodity prices. 25% of cash flows are damaged by the rates of the fossil fuels it handles. Roughly, 25 percent of the cash flows are exposed to the rates of natural gas, NGLs, and crude oil. Revenues from its midstream business lowered 40 percent to $192 million due to the fall in NGL prices. Investors should look at this specific element of William's Q3 earnings report.

A considerable number of Williams' new projects are fee based. Fee-based projects will minimize the effect of commodity pricing on the William's profit. Williams Partners overall fee based business is expected to grow up to 90 percent by 2014.

Future Guidance

Recently, the partnership modified its perspective for 2012, 2013 and 2014. It reduces its earnings perspective for the same period due to poor commodity prices. The partnership retained its 2012 distribution per unit of $3.14, an increase of 8 percent over 2011. The partnership projected that the distribution for 2013 and 2014 will rise by 9 percent to $3.43 and $3.75, respectively.

Williams Partners has shrunken its 2012 distributable cash flow goals to $1.6 billion and to $1.9 billion for 2013. The projection for 2014 is $2.3 billion. This revision primarily reflects lower than predicted NGL prices and greater than normal maintenance capital expenditures. WPZ has learned from the decline in the prices of NGL, as it moves towards fee-based businesses.

Competition

WPZ

EPD

CLMT

Industry Average

P/E TTM

17.6

19.5

10

29.7

P/B

2.2

3.8

2.1

2.8

Yield %

5.90

4.66

6.92

4.7

Rev Growth (3 Yr Avg)%

119.4

7.7

8.0

7.1

EPS Growth (3 Yr Avg)

6.2

9.0

-10.1

-6.5

Operating Margin % TTM

22.8

7.0

5.0

11.1

Net Margin % TTM

13.7

5.5

3.9

4.7

ROE TTM

13.8

20.4

25.5

10.8

Debt/Equity

0.9

1.1

1.0

1.4

Click to enlarge

(Sourced from Morningstar.com)

Williams Partners main competitors are Calumet Specialty Products Partners LP (CLMT) and Enterprise Products Partners LP (EPD). William partners have a market capitalization of 18.2 billion. CLMT and EPD have a market capitalization of 1.8 billion and 46.6 billion. WPZ has a yield of 5.90%. WPZ has increased its distributions by 8% in 2012 and projected to increase distributions by 9% in 2013 and 2014. However, many MLP's are high yield stocks. CLMT and EPD are also presenting high yield of 6.92% and 4.66% and industry average stood at 4.7%.

The most attractive WPZ metrics are its growth rate and margins in comparison with its competitors. Growth rate and margins give the upper hand to William Partners over its peers. WPZ has boosted its revenue by 119.1% in the last three years. EPD and CLMT raised their revenues by 7.7% and 8% in last three years. In my opinion, revenue growth is the basic metric which make or break a business.

WPZ also looks better in terms of margins. WPZ has produced extremely high operating margin of 22.8% and net margin of 13.7%. These margins are better than the industry average. WPZ has financial leverage of 2.17 in trailing twelve months. CLMT and EPD have financial leverage of 2.39 and 2.72. Debt is not an issue for Williams Partners at the moment.

Final Thoughts

I believe Williams Partners is the best choice for income seekers. The company is expected to increase in its distributions by 8% - 9% in the coming two years. I further believe that the addition of olefins production to its business would create a significant additional income.

WPZ margins and growth rate are outstanding in its industry. The down fall in its revenue and cash flow will diminish as the partnership is shifting towards fee-based businesses. Fee-based business contributes greatly to distributable cash flow. The magnitude of the shift toward fee based business is significant. WPZ has projected 90% growth in its fee-based revenue from 2011 to 2014.

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

Business relationship disclosure: EfsInvestment is a team of analysts. This article was written by Siraj Sarwar, one of our writers. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.