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Williams Companies, a provider of a wide range of energy services, has seen its share price plunge some 85% from its 1999 high. Following a turbulent year of losses tied to the company's energy marketing, wholesale power generation, and former broadband unit. But we at Standard & Poor's believe a turnaround is in the offing for Williams (WMB ), and think the shares offer speculative appeal as management works to transform the company's fortunes. Williams originally was upgraded in late April to S&P's highest investment recommendation of 5 STARS, or strong buy.
Williams' top brass is currently in the process of transforming its capital structure and business operations through a series of divestitures. In 2002, Williams closed on 17 different asset sales for $3.8 billion in cash, $835 million in assumed debt, and $570 million in other consideration. In late February, management detailed a deleveraging campaign intended to return the company to investment-grade credit status by 2005. The linchpin of this restructuring effort: another $4 billion in aggregate divestitures projected for 2003 and 2004.
Given prospects for lower capital expenditures and increasing operating cash flow, we believe the ultimately delevered Williams should post nearly $1 billion of free cash flow to equity by 2005.
ASSETS FOR SALE. Standard & Poor's has been impressed by Williams' execution since the unveiling of its February deleveraging initiative. Since the plan was announced, the company has closed on or announced asset sales totaling approximately $2.1 billion in cash. Importantly, included within these asset sales has been the sale of three positions from the book of the company's Energy Marketing & Trading (EM&T) unit for $256 million in cash. The successful divestment of EM&T positions reduces the collateral requirements for the company's capital-strained energy merchant operation.
Williams has been among the most successful of the energy merchants at liquidating its EM&T book and we believe its yearend 2002 settlement agreement with California and other western states bodes well for the marketability of additional EM&T contracts. Williams is the only leading energy marketer to resolve disputes over refund claims from the California energy crisis and long-term power supply contracts.
In May, 2003, Williams' senior unsecured debt was upgraded to B+ by both Standard & Poor's Ratings Services (which had previously rated it B) and Fitch Ratings Services (B-). To our knowledge, only one other energy merchant (Reliant Resources [RRI]) has received a credit upgrade since the beginning of 2002. Also in May, Williams boosted its capital position by selling to institutional investors $300 million of 5.5% coupon notes convertible into common stock at $10.89 a share.
BACK TO BASICS. As a result of these asset sales, Williams will be left with three core business units -- Exploration & Production (E&P), Pipelines, and Midstream Gas & Liquids. Given the strained supply/demand relationship within the natural-gas sector, S&P views Williams' presence across the natural-gas value chain as very encouraging.
A number of highly profitable expansion projects for Williams' core operations are expected to be completed in 2003 and 2004. We see the conclusion of these projects contributing to both increasing operating cash flow and declining capital expenditures. During 2003, the company expects to complete about $540 million of pipeline-expansion projects (increasing capacity by 828 million dekatherms per day on its remaining wholly owned Transco and Northwest pipelines). This will replace nearly half the capacity lost by the company's May, 2003, divestiture of its Texas Gas Pipeline system for $1.045 billion (including $250 million in assumed debt).
S&P believes Williams will also be finishing significant Midstream deepwater gas and oil production projects, including the Devil's Tower project in the eastern Gulf of Mexico (which may come online in the first quarter of 2004). Williams has stated that the $462 million Devil's Tower project could yield about $57 million in first year operating profit. With the completion of these Midstream projects, Williams sees capital expenditures for this segment dropping from over $200 million in 2003 to under $50 million in both 2004 and 2005.
Copyright 2003, Bloomberg L.P.
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