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Coverage Initiation: Williams Partners, L.P.
Williams Partners (WPZ) recently made its debut in The Value Line Investment Survey. The master limited partnership operates in the midstream energy and oil and gas transportation sectors. It owns nearly 14,000 miles of oil and gas pipelines in the United States with an annual throughput capacity of 2,700 trillion British Thermal Units (BTUs). The partnership’s midstream unit owns natural gas gathering, treating, processing, and fractionating facilities.
Williams Partners was formed in 2005 by The Williams Companies (WMB) in order to own pipeline and midstream assets in the tax-advantaged master limited partnership structure. The partnership remained quite small for some time.
In February, 2010, the Williams Companies finished the creation of the Williams partnership by contributing the remainder of its pipeline and midstream assets to the partnership in a “dropdown” transaction. Williams Partners, as a result, became a leading oil and gas MLP and spent much of the rest of 2010 consolidating its position; it increased its share in various pipelines, purchased the other Williams-related partnership, acquired a substantial gas gathering and processing operation in the Piceance basin of Colorado from the Williams Companies, and inked an agreement to buy midstream assets in the Marcellus shale from Cabot Oil & Gas (COG).
Williams Partners’ pipelines business is volumetric and fee-based; customers pay to reserve a certain capacity of pipeline or storage, whether they use it or not. Most customers sign long-term capacity-reservation contracts. Only a small portion of this segment’s revenues come from short-term fees. The unit thus provides the partnership with a very steady revenue stream and a reliable source of cash flow.
The midstream (largely gas processing) business is a bit more volatile, because it is exposed somewhat to commodity-price fluctuations. Recently, the movement has been to the upside, as wide natural gas-oil price differentials have boosted gas-derived ethane’s appeal to the petrochemical industry as a feedstock for ethylene production (versus oil-derived naphtha). This dynamic has boosted Williams Partners’ gas fractionation business. The prospects for profit, cash flow, and distribution growth in 2011 are thus very good.
All told, Williams Partners is well-positioned in its industry; although the units have already advanced markedly in price and may experience only meager appreciation in the coming years, they are nevertheless an excellent choice for income-oriented investors.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.