December 05, 2017 - 4:10pm EST by
2017 2018
Price: 36.35 EPS 0 0
Shares Out. (in M): 974 P/E 0 0
Market Cap (in $M): 35,398 P/FCF 0 0
Net Debt (in $M): 15,337 EBIT 0 0
TEV ($): 52 TEV/EBIT 0 0

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  • MLP



We are proposing a simple sum-of-the-parts pair trade, involving WPZ (long) and WMB (short).


Williams is a natural gas focused midstream company. The company's main assets include: Transco (the largest and most valuable natural gas pipeline in the US) and a vast gathering business across the Marcellus and Utica. 


Williams has two publicly traded securities: WMB and WPZ. WMB (Williams Cos.) is structured as a C-corp and it's only asset is ownership of WPZ units. WPZ (Williams Partners LP) is an MLP and all of the operating assets of Williams are held at the WPZ level.


WMB sole asset is 72% ownership of the outstanding WPZ units. Despite only owning WPZ units, WMB trades at a 18.1% premium to the value of the WPZ units it holds. On 1/9/17, WMB swapped its IDRs for WPZ units. Since that day, the spread between WMB and the value of the WPZ units it owns (NAV) has ranged from 0% to 19%.


In the medium term, WMB is likely to buy the remaining public units of WPZ given the diminished advantages of maintaining an MLP and the potential cash flow savings of eliminating the MLP given the lower dividend payout at WMB (which would save the overall Williams complex about $200mm/yr in dividend payments). This lower dividend payout will accelerate deleveraging and reduce the need for external funding, both of which are critical in this environment. Once tax reform is finalized, Williams will have the clarity needed to determine the benefits of eliminating the MLP and buying the 28% of WPZ currently owned by the public.


Given the likelihood for WMB to buy out the remaining WPZ stake, the spread should narrow over time. In 2015, WMB offered to acquire the remaining outstanding WPZ units for a 15% premium. A premium of this magnitude would collapse the spread to -1% today.


To implement this trade on a neutral economic value basis (accounting for net debt on the respective balance sheets of WPZ and WMB), you’ll need to go long $1.2mm of WPZ for every $1.0mm short of WMB.


I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


  • WMB closing down the MLP structure by acquiring WPZ.
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