Williams Bets $2.4 Billion on Pipe Venture Chesapeake Quit

Williams Bets $2.4 Billion on Pipeline Venture Chesapeake Quit
A Williams Cos. natural gas pipeline. Source: The Williams Cos./via Bloomberg

Williams Cos., the third-largest U.S. pipeline company, is betting as much as $2.4 billion it can profit from a shale-pipeline partnership that Chesapeake Energy Corp. exited earlier this year.

Williams agreed to acquire a 25 percent stake in Access Midstream Partners LP and 50 percent of its general partner, the Tulsa, Oklahoma-based company said in a statement yesterday. Chesapeake shed its stake in the Access pipeline venture, formerly known as Chesapeake Midstream, in June as the natural gas producer auctioned properties from Appalachia to the Rocky Mountains to plug a cash flow shortfall.

Williams, whose pipes ship gas between markets thousands of miles apart, has expanded under Chief Executive Officer Alan Armstrong into gathering the fuel directly from gas fields and shipping it to plants that strip out impurities and byproducts. In March, Williams spent $2.5 billion to acquire Caiman Energy LLC’s pipelines in the Marcellus Shale, a formation that ITG Investment Research estimates is the largest U.S. gas reservoir.

The Access agreement “allows us to get very large-scale positions in basins as opposed to having to go in and get struggling positions in basins and try to build those up,” Armstrong said during a conference call with analysts yesterday.

Armstrong’s other forays into shale regions included a $380 million investment in a Caiman pipeline network in Ohio’s Utica Shale in June.

Tax-Free Payouts

Access and Williams have little overlap in their current operations and will continue to operate as separate companies, Mike Stice, Access’ CEO, said on a conference call.

The deal gives Williams a stake in a second tax-free partnership. Access is structured as a master-limited partnership, so it pays no federal income taxes as long as it pays out most of its cash to its shareholders. The stake in Access’ general partner means Williams is entitled to an increasing share of cash flow as it grows and also to collect dividends on the partnership’s common units.

Williams’s dividends have increased an average of 26 percent a year during the past five years, according to data compiled by Bloomberg, with a 54 percent jump over the past year. They have been boosted from its ownership in Williams Partners LP. Access is on a similar “inflection curve,” Armstrong said on the conference call.

Dividend Growth

The added cash flow will allow Williams to continue raising its dividends into 2015 and will protect it from swings in the price of gas and byproducts such as propane, since most of Access’ revenue comes from long-term contracts, Carl Kirst, an analyst with BMO Capital Markets in Houston, wrote in a note to clients today.

“Investors will still need time to digest, we think, but we like the transaction even recognizing the benefits are long term in nature,” Kirst wrote.

Global Infrastructure Partners will retain the remaining 50 percent of Access’ general partner and 43 percent of the limited partnership units, Williams said in its statement. Global Infrastructure, the investment fund led by Adebayo Ogunlesi, started the original pipeline venture with Chesapeake Energy in 2009 that later became Chesapeake Midstream.

Williams fell 0.8 percent to $31.13 at the close in New York. The shares have risen 15 percent this year. Access dropped 5.5 percent to $32.15, the biggest decline since May 11. Chesapeake fell 0.8 percent to $16.96.

Funding Gap

Stung by a plunge in U.S. gas prices and capital spending commitments that have exceeded cash flow in 19 of the past 21 years, Chesapeake earlier this year said it may run out of cash as soon as 2013. CEO Aubrey McClendon set about finding buyers for gas fields and pipeline networks to finance his push to slash debt and transform the second-biggest U.S. gas producer into an oil company.

Chesapeake said a previously announced $2.16 billion sale of pipelines to Access closed yesterday, along with a separate $175 million sale of pipelines in Oklahoma and Texas. The company expects to sell its remaining tranche of pipeline assets by the end of the first quarter for $425 million.

Jefferies & Company Inc. and Goldman Sachs & Co. advised Chesapeake on the pipeline sales.

Kinder Morgan Inc. and Enterprise Products Partners LP are the two largest U.S. pipeline companies by market value.

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