The energy and E&P business has been no stranger to spinoffs and over the past few years numerous companies have pursued this strategy to unlock shareholder value. So it was no big surprise when in February Williams Companies (WMB) announced plans to split itself into two. To be fair, another reason the announcement wasn’t much of a surprise is that the company launched a strategic review looking at its options, including a spinoff, just three years ago. Those plans ultimately got shelved though as oil prices plunged and the credit markets froze up.
In addition to its stake in Williams Partners (WPZ), Williams Companies will focus on infrastructure and pipelines which – I like the way they put it – “optimize and connect North America’s abundant natural resources to premium markets”. The new company, WPX Energy, will operate as a diversified E&P company. One of the reasons for the move is that with vastly different risk profiles, the two companies can attract distinctive investor bases and allow investors to select their exposure.
The spinoff is expected to take place in two stages with WPX first offering up to 20% of its shares in an IPO during Q3 2011 and the rest of the company being spun out to shareholders in 2012. The process is moving along smoothly as WPX Energy recently filed its registration statement with the SEC and a copy of its S-1 can be found here. Beginning in June, Williams will start paying out fatter dividends with an expected initial 60% increase followed by another 10-15% divvy jump next year. The company plans to use the booty from the IPO (an expected $750m) in order to pay down its sizable debt balance.
Here is Dan Loeb’s, manager of hedge fund Third Point, opinion on Williams (taken from his most recent investor letter):
The Williams Companies is a diversified energy company with two primary segments: energy exploration and pipelines. It had long been seen as an attractive candidate for a spin‐off restructuring. In 2005, the Company had spun out a portion of its pipeline business into a publicly traded MLP (Williams Partners LP – WPZ) but had never moved seriously to split the two businesses completely. However, in the Fourth Quarter of 2010, two important “tells” suggested to us that the situation had changed. First, the Company’s long time CEO, who had been opposed to pursuing a spin‐out, announced his retirement.
Second, in November the Company announced the acquisition of some attractive acreage in the Bakken Shale, an acquisition that we believed was at least partly motivated by a desire to improve the standalone investment appeal of its E&P business segment. We invested around this time, and were rewarded in February when the Company announced it would split the Company via an initial IPO of the E&P business (selling 19% of that business to the public) in the second half of 2011 and then execute a full spin of the remaining 81% to shareholders in early 2012.
Since our initial investment, prospects for the company and its valuation have continued to improve due to factors including: 1) the recent IPO of Kinder Morgan, a similarly positioned company, which highlighted the value of General Partnership (GP) interests in MLPs, 2) continued execution by the WMB management team on additional midstream investments, and 3) improved liquefied natural gas prices due to strong chemical demand and higher oil prices. We believe that the shares remain significantly undervalued and have added to the position.
Loeb is also long El Paso (EP) whose shares soared upon announcement of a strategic review. Williams shares popped over 10% upon the announcement and it really makes you wonder why the market continues to discount these companies on a ‘sum of the parts’ basis. Similar spins are in the proverbial pipeline and previous moves like this have fared decently, including Questar’s (STR) spin of QEP Resources (QEP). We will keep you updated as more info is released.
Disclosure: Author is currently long shares of El Paso (EP).