Energy

Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal's "Heard on the Street" column. Before that, he wrote for the Financial Times' Lex column. He has also worked as an investment banker and consultant.

Williams Cos. is leaving the second quarter with a bang -- that bang being the door to the boardroom, as almost half the occupants storm out.

It's a fitting end not merely to the Energy Transfer takeover attempt on Williams, which segued from "At Last" to "Please Release Me" in all of nine months. It also rounds out what has been an incredible quarter for the whole pipeline and master limited partnerships sector -- but one that came with a catch.

First, Williams: Having earlier resisted the charms of Energy Transfer -- and taken on two activist investors amid an underperforming stock price -- Williams finally succumbed to an overpriced, overleveraged offer last September.

Engagement Wrong
Indexed price performance
Source: Bloomberg

Buyer's remorse set in at Energy Transfer with an undignified haste that only became more undignified as time wore on. The company then engaged in a series of moves that should have scared off any potential bride, including jettisoning its chief financial officer and trashing its synergies estimates. Yet, with a $6 billion check in the offing, Williams clung on. Energy Transfer was ultimately saved by a taxation technicality a Delaware judge described as a lottery win. Williams is appealing that judge's ruling, but the deal looks dead.

The board bust-up revolved mostly around the question of whether CEO Alan Armstrong is the right person to lead the company forward as a singleton. In one sense, this is alarming, especially with two activist shareholders among the departed. Apart from the question of whether those activists will dump their combined 8.4 percent stake, there is a legitimate concern Williams could return to the laggardly performance that attracted their attention in the first place.

On the other hand, it is hardly surprising that the tumult of the past nine months -- with the board originally split over the Energy Transfer deal anyway -- has resulted in such a denouement. Provided Williams abandons its prior plan, at least for now, to merge with its MLP, Williams Partners -- which would leave its balance sheet looking stretched -- it could take the opportunity to refocus on cutting costs and paying off debt. A dividend cut looks likely -- the yield is around 12 percent -- and Kinder Morgan's experience on that front in December suggests it is better to rip off the Band-Aid quickly rather than tug at it piecemeal.

In doing so, Williams could draw some comfort from the fact that its stock, up 35 percent in the second quarter, beat the Alerian MLP Index handily. And that's despite this being the second-best quarter for the index ever.

Recovery Position
This was the best quarter for the Alerian index since early 2013
Source: Bloomberg

But, as so often, there's a "but." Two of them, in fact.

First, good as the quarter was, it ended with the collapse of Energy Transfer's bid for Williams. Besides symbolizing the sector's prior excesses, it also dragged the issue of weak governance back into the spotlight. Exhibit A: Energy Transfer's resort to issuing new preferred securities to insiders, including Chairman and CEO Kelcy Warren, that would effectively have insulated them from the damage the deal would have wreaked on dividends. Indeed, the judge who effectively killed the deal's chances cited those preferreds as one reason he considered Energy Transfer's position in the case with a "skeptical eye." Investors should bear this in mind as and when the company's acquisitive instincts are rekindled.

Second, it's worth considering how much of the second quarter's rally was fueled by oil.

Barreling Along
The Alerian MLP index's correlation with the crude oil price hits its highest level ever in the second quarter
Source: Bloomberg
Note: Rolling 90-day correlation coefficient. A reading of 1.0 indicates perfect positive correlation.

If you happen to be an oil bull, then this chart makes for happy reading. Be aware, though, that the oil rally has been fueled in large part by unpredictable supply outages and excitement about U.S. gasoline demand that looks increasingly overdone. Meanwhile, the MLP sector still has a ways to go on the fundamental issues of delevering and restoring faith in dividends and strategy. After a sprightly spring, it could be a choppy summer.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Liam Denning in San Francisco at ldenning1@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net