We issued an updated research report on The Williams Companies, Inc. (WMB - Free Report) on May 21. The company’s proposed acquisition of Williams Partners L.P. (WPZ - Free Report) units will simplify its corporate structure and improve operational efficiencies. However, we are worried about the constant regulatory setbacks the Constitution Pipeline is facing.
Williams Companies currently carries a Zacks Rank #3 (Hold), implying that the stock will perform in line with the broader U.S. equity market over the next one to three months.
The midstream energy player’s offer to absorb the rest of its midstream partnership for $10.5 billion is expected to simplify its organizational structure and improve its credit profile. The transaction will also help the company enhance its dividend coverage, making its 5% yield payout more sustainable.
With an attractive dividend coverage ratio and above-average payout growth rate, Williams Companies is much favored by investors seeking a steady source of income. Moreover, the company has a long and consistent dividend-paying record. It has paid a common stock dividend every quarter since 1974. As such, we view Williams Companies' dividend as safe and reliable.
Growth prospects for energy infrastructure all across North America remain exciting with the requirement to support producers in the growth of shale plays, especially in regions where there is a severe lack of facilities. This creates exciting opportunities for a pipeline firm like Williams Companies as it looks to capture the economic benefit of this trend.
However, Williams Companies’ high-profile gas project, the Constitution Pipeline, is grappling with lawsuits and has been denied a water permit by both FERC and New York DEC for environmental reasons. Though the firm plans to seek a rehearing, it has crushed possibilities of the pipeline coming online by 2019. This will most likely affect the company's near-term earnings outlook.
We are concerned about Williams Companies’ high debt level which leaves it vulnerable to volatile commodity prices. As of Mar 31, 2018, the company had long-term debt of $21.4 billion, which represents a debt-to-capitalization ratio of more than 69%. The high leverage restricts the financial flexibility of the firm and limits growth. Moreover, the stock lost 9.4% over the past year, compared with the industry’s 11.3% decline.
Stocks to Consider
Two better-ranked players in the energy sector are BP plc (BP - Free Report) and WildHorse Resource Development Corp. (WRD - Free Report) . Both the stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
BP managed to beat the Zacks Consensus Estimate in three of the last four quarters.
WildHorse is expected to see year-over-year earnings growth of 288.4% in 2018.
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