Williams To Spin Off Oil, Gas Exploration and Production Unit in an IPO

Williams Cos., the fourth-largest U.S. pipeline operator by market value, will sell as much as 20 percent of its oil and natural-gas exploration unit in an initial public offering.

Williams also said it will raise its quarterly dividend by 60 percent to 20 cents per share for the first quarter 2011, to be paid in June. It plans an additional increase of as much as 15 percent next year.

The IPO is scheduled for the third quarter, the company said in a statement. The remainder of the oil business will be spun off to Williams shareholders next year. After the transactions, Williams’ shareholders will own stakes in two publicly traded companies: a pipeline company and an exploration company.

“Williams has generated significant value by operating as an integrated natural-gas company, Chief Executive Officer Alan Armstrong said in a statement. ‘‘As we look to the future, though, we are convinced that the capital efficiency created by separating into two distinct investment opportunities will allow shareholders to realize greater value.’’

Williams’ oil exploration division produced $841 million in revenue in the third quarter, a fivefold increase over the 2009 third quarter as oil prices rose during the year. The company’s pipeline and storage operations generated $1.4 billion in third quarter revenue, a 25 percent decline from the third quarter 2009.

Enterprise Value

The new exploration and production company will have an enterprise value of about $7 billion, which includes debt and equity, Carl Kirst, an analyst at BMO Capital Markets in Houston, said in an telephone interview today. The IPO may raise more than $1 billion, he said.

Williams rose $3.74, or 13 percent, to close at $31.50 in after-hours trading on the New York Stock Exchange.

BMO said in a Feb. 14 note to clients, when Williams was trading at about $27, that the exploration and production unit may be worth about $10 a share if separated from Williams. Williams’s core pipeline business would then be worth about $17 a share, which might rise to $26 or $27 by 2013, BMO estimated.

Investors have been expecting Williams to spin off its oil and gas business, said Kirst, who has an ‘‘outperform” on Williams shares and owns none.

Kinder IPO

“It’s come a few months earlier than we expected,” he said. “What changed the calculus a little bit was the very strong reception and IPO of Kinder Morgan,” he said.

Kinder Morgan Inc., a Houston-based energy and pipeline company, sold 95.5 million shares at $30 each to raise $2.9 billion, or 23 percent more than it first sought, in a Feb. 11 initial public offering.

Credit ratings agencies responded positively to Williams’s planned spinoff. Standard & Poor’s put the company on “CreditWatch with positive implications,” saying it expected the separation of the exploration and production business to improve the company’s credit profile.

“We view the E&P business as notably riskier than Williams’ pipeline and midstream segments, due to its cash flow volatility and the significant capital requirements needed to maintain production levels and reserves,” the agency wrote in a note after the announcement.

Moody’s Investors Service said it may upgrade its ratings of Williams’ pipeline subsidiaries.

Improved Risk Profile

“The announced separation of the E&P business will improve Williams’s consolidated business risk profile while also facilitating debt reduction at the parent company,” Moody’s Vice President Peter Speer said in a statement.

Williams, based in Tulsa, Oklahoma, was founded by brothers Miller and David Williams in 1908. Williams’s pipeline division owns or operates more than 15,000 miles of natural-gas pipelines, according to the company website. Its exploration division reported the equivalent of 4.5 trillion cubic feet of natural gas in proven reserves as of Dec. 31.

Williams acquired Denver-based Barrett Resources in 2001 for $2.86 billion, tripling its natural gas reserves. Williams paid $925 million to acquire 85,800 acres in North Dakota’s Bakken crude oil formation in November.

The initial public offering will not require shareholder approval, the company said. Williams did not disclose how many shares would be sold or at what price.

Barclays Plc, Citigroup Inc. and JPMorgan Chase & Co. are serving as financial advisers. Gibson, Dunn & Crutcher LLP is Williams’s legal adviser.

Williams will report its earnings tomorrow before the stock market opens, and has scheduled a conference call for investors at 9:30 a.m. New York time.

To contact the reporter on this story: Mike Lee in Dallas at Mlee326@blooomberg.net. Edward Klump in Houston at eklump@bloomberg.net.

To contact the editor responsible for this story: Susan Warren at susanwarren@bloomberg.net.

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