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.

Another dividend goes down the pipe. But in the case of Williams Cos., a few twists and turns in that pipe bring some of the money rolling back.

Williams, recently jilted at the altar by Energy Transfer Equity, has joined the ranks of pipeline companies cutting dividends to conserve cash. Of 57 U.S. pipeline operators screened on Bloomberg that haven't succumbed to bankruptcy, 18 have now either cut dividends or stopped raising them in the past year.

Williams' 69 percent cut is on a par with the 75 percent savaging Kinder Morgan doled out last December, kicking off a wave of resets in the sector.

Investors didn't seem to mind, though: Williams' shares were up 7.5 percent on Tuesday morning.

Put that down to two things.

The first is that the market seems to have reached the acceptance stage of its grieving process for once high-flying, and over-hyped, pipeline stocks. Kinder Morgan is a good example of how this has played out. Look at how that stock performed through 2015 up until that fateful dividend cut:

Losing It
Toward the end of 2015, investors lost confidence in Kinder Morgan's balance sheet
Source: Bloomberg
Note: Performance indexed to 100

Despite the nasty aftertaste, though, the medicine has worked very well:

Recovery Position
After some initial heavy selling, Kinder Morgan's stock has largely kept pace with the pipeline sector
Source: Bloomberg
Note: Performance indexed to 100

Similarly, Plains All American Pipeline, which held out until late last month before cutting its dividend, isn't worse off for it, with its units beating the Alerian MLP Index slightly since. Investors, like all good sinners, have come to accept that the excesses of the shale boom have to be worked off, and that means diverting cash to appease the gods of the bond market.

So it goes with Williams, albeit with a twist. Cutting the dividend saves about $1.3 billion a year. Through the end of 2017, though, most of that will be invested in the company's separately-listed MLP, Williams Partners. This subsidiary provides the bulk of Williams' income, with the parent owning a 60 percent stake. For Williams Cos., therefore, enabling the MLP to invest for growth while protecting its investment-grade credit rating is critical.

What's more, as Williams buys more shares in the MLP, it nets itself a healthy yield. That isn't just because Williams Partners' units offer a dividend yield of 9.6 percent. In addition, as the general partner, Williams Cos. gets bonus payments called incentive distribution rights, effectively a hefty cut of dividends paid on all of Williams Partners' units. In effect, instead of the $3.40 a year that ordinary investors get paid annually for every unit they own in the MLP, Williams Cos. gets about $4.94 -- a real yield for the parent of almost 14 percent.

Williams Cos. has committed to reinvest the dividends on much of the new units it will get in its subsidiary through the end of next year. Even so, there's no escaping the fact that Williams Partners, the engine of this whole edifice, is still paying through the nose for equity capital.

Just as Plains All American announced alongside its dividend cut that it would ditch its own high-cost, separated structure, the clock is ticking on Williams' current arrangement. It belongs to a bygone era and is a hindrance to long-term recovery.

On this front, Williams' new plan at least edges towards a solution. Based on planned investment of $1.7 billion through next year, and at Williams Partners' current price, the parent's stake would rise closer to 70 percent. By the time 2018 rolls around, a buyout to reunify the Williams family should be all but certain.

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