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. spent much of the past year engaged in a game of hard-to-get with Energy Transfer Equity that morphed into hard-to-understand. Now an activist wants the pipeline company to play hard-to-get-past-it.

Keith Meister, the activist who runs Corvex Management, trashed the board of Williams in a CNBC interview on Monday. He had supported the Energy Transfer deal and, along with five other directors, walked off the board in June after failing to dislodge current CEO Alan Armstrong. Meister now threatens a proxy battle to force the issue, citing a history of failures at Williams under Armstrong's leadership.

Yet Keith Goddard, who runs Capital Advisors, which owns a relatively small stake in Williams, suggests looking at the stock performance back to before Corvex and fellow activist Soroban Capital Partners arrived on the scene. That chart puts things in a somewhat different light.

Where Did It All Go Wrong?
Williams outperformed for much of Armstrong's tenure, until the Energy Transfer deal debacle
Source: Bloomberg
Note: Performance indexed to 100.

When Corvex and Soroban declared their stake in Williams in December 2013, the stock had been struggling, rising only 15.5 percent in the prior 12 months, compared to the S&P 500's 24.5 percent. That June, there had been a fatal explosion at a Williams chemicals plant in Louisiana -- indeed, Meister criticized the company's safety record in Monday's interview.

Yet one look at the chart shows that, on a longer timescale, Williams' stock had been beating both the pipelines sector and the market overall. 

The obvious catalyst for its fall from grace was two deals done after the activists became involved. The Access pipeline deal cost $6 billion in cash and raised Williams' exposure to struggling E&P firm Chesapeake Energy just as the worst commodities crash in a generation was about to take hold.

Then, the big one: the deal with Energy Transfer, which Meister backed and Armstrong had resisted. This threatened to create a sprawling energy conglomerate crushed by its own balance sheet -- which is precisely why Energy Transfer did all it could to get out of it.

Since that deal collapsed, Williams has actually made some strategically sound moves, biting the bullet by cutting its dividend and announcing a deal to reduce its exposure to Chesapeake. The stock has jumped by a third, compared with a slight drop in the Alerian MLP index and a 6 percent gain for the S&P 500.

Part of that gain has to do with reports Williams had been approached about another potential takeover earlier in the summer, this time by Enterprise Products Partners. Meister said this must have been after he left the board, but said Williams should entertain such an offer if it came at a reasonable premium.

Yet the very fact that Williams is apparently the target of another potential suitor speaks to the value of its core natural gas pipelines. Given that, why sell now? Williams' stock trades at just over $28. Whack on a 30 percent premium, and the implied takeover offer would be about $36.50. That is not only 27 percent below where Williams traded a year ago. It is also only a little above Bloomberg's estimate of Corvex's cost basis of $32.29.

Williams does have a lot of work to do. Meister pointed out a track record of missing financial expectations; and it is true that, out of 22 quarters since Armstrong took over, Williams has missed consensus earnings forecasts in 12 of them, according to data compiled by Bloomberg. Then again, Energy Transfer, the company Meister wanted Williams to merge with, missed in 13 quarters over the same period.

Like many pipeline companies, Williams took on too much debt and must now fix that while navigating an extended downturn. Its new strategy is headed in that direction. Throwing this up in the air -- again -- at the behest of an investor who backed the worst strategic move Williams made in the past five years doesn't sound like a promising course of action.

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

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

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