Time To Dump Williams Companies

| About: Williams Companies (WMB)
This article is now exclusive for PRO subscribers.

Summary

The Williams Companies buyout is on the rocks.

Activist Keith Meister is underwater, I’m almost underwater.

It’s time to take a hard look at whether to double down on Williams Companies.

I bought into the Energy Transfer Equity (NYSE:ETE) and Williams Companies (NYSE:WMB) deal a couple of months ago when things were dire. Energy Transfer Equity was trading below $5 a share and the stock has come back nicely thanks to the oil rebound.

Now, Williams Companies hasn't roared back as much given the lackluster performance in gas. So with shares of Williams Companies trading right around $20 I'm working through the process of dumping Williams Companies shares and redeploying to other areas of the energy market or double down.

Activist Investor To The Rescue?

Keith Meister, who runs Corvex Management and is the former right-hand man of Carl Icahn, has been an activist investor involved with Williams Companies since 2013. At the 13D Monitor Active-Passive Investor Summit, Meister noted that shares are well below where it invested. Thanks to the shale boom, he saw his investment take off - but with the oil collapse, Williams Companies' stock is now down 45% since Crovex went activist. It's still a major holding of Corvex, now its second largest holding. Granted, Crovex isn't the only fund that's gotten burned on Williams Companies.

With the landslide happening in Williams Companies, Meister become a big proponent of oil and gas consolidation - helping push for the buyout by Energy Transfer Equity. At first Williams Companies, rebuffed the overtures from Energy Transfer Equity, but with Meister's prodding gave in. Meister has no qualms targeting energy companies with excessive capital expenditures. This just turned out to be a case of poor timing. But things become more enticing for both companies if oil can get even higher in the near-term. Meister mentioned at the 13D conference that he believes oil prices can get to $65 a barrel next year.

Deal On The Rocks

Energy Transfer Equity was hoping to grow its already robust presence in oil and gas infrastructure, with the big draw being impressive synergies. However, those expected synergy numbers have been whittled down to a fraction of what was initially expected.

So, the cash and equity deal is a lot less enticing for both sides. The $8 a share in cash that would be paid to Williams Companies' shareholders is a small consolation to having to take majority via equity of a newly formed company. Then we have the fact that the deal might not be tax-free for Williams Companies' shareholders, where we could get taxed on the stock portion of the deal.

I don't want to take the risk that the deal goes through, instead I plan on selling off our position and reassessing after the merger (hopefully) falls through. Energy Transfer Equity might not even be able to front the bill for the cash portion of the deal, which would be an additional $5+ billion in debt for the company. Something that's becoming increasingly hard for a company that's already heavily indebted company.

Williams Companies As A Stand Alone

The Marcellus Shale is still appealing, but is that and Williams Companies stronghold on the region enough to keep me interested in the company.

Without the Energy Transfer Equity deal it's still a solid infrastructure gas play here in the U.S. The gas production in the Marcellus is still on the rise, while already having peaked pretty much everywhere else in the U.S.

There's been the overblown worries of a Chesapeake Energy (NYSE: CHK) bankruptcy and the exposure there. The big silver lining is the exposure to natural gas, which could get a boost going forward. Natural gas prices in the U.S. have fallen fast, spurring new demand.

By all accounts the two - Energy Transfer and Williams - could very well decide to abandon the merger push and terminate the deal without material costs. With that, Williams Companies becomes much more of a dividend story with a major position in Williams Partners (NYSE: WPZ). With the recent developments and gross uncertainty around the deal and oil prices, the best bet is for the two to part ways. Until then, I'm looking to make a swift exit from Williams Companies (holding onto the Energy Transfer position) and reevaluate Williams Companies if the two don't merge.

Disclosure: I am/we are long ETE, WMB.

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.