On Apr 3, Zacks Investment Research downgraded North American energy firm Williams Companies Inc. (WMB) to a Zacks Rank #5 (Strong Sell) following the stock’s recent gains, which have brought valuation inline with our earlier expectations.
With natural gas prices likely to remain soft in the near- to medium-term, Williams’ margins are expected to suffer in the next few quarters. The company’s fairly debt-heavy balance sheet also remains an issue. Additionally, the transfer of the exploration and production operations has heightened Williams’ risk profile.
Why the Downgrade?
The glut in domestic gas supplies continues with storage levels remaining above their five-year average. This translates into a bearish near- to medium-term outlook for natural gas-weighted firms like Williams Companies, more so after considering the fact that shares have already risen by approximately 10% during the last month.
We believe that transfer of the upstream assets – into a separate, independent and publicly traded company WPX Energy Inc. (WPX) – has left Williams with a less diversified business. As a result, the business risk profile of the reorganized Williams is weaker than that of the pre-spin-off company.
Finally, we remain concerned about Williams Companies’ high debt levels, which leave it vulnerable to an extended drop in commodity prices. As of Dec 31, 2012, Williams had long-term debt of more than $10.7 billion, representing a debt-to-capitalization ratio of 69.3%.
As a result of these bearish factors, the tendency for a downward estimate revision has been more obvious in recent times. In fact, the Zacks Consensus Estimate for the first quarter has moved down by 4 cents (or 14%) to 24 cents per share over the last 60 days. The Zacks Consensus Estimate for the full year is 98 cents, down 19 cents (or 16%) in the same timeframe
Stocks that Warrant a Look
While we expect Williams to perform below its peers and industry levels in the coming months and see little reason for investors to own the stock, one can look at NGL Energy Partners L.P. (NGL) and Calumet Specialty Products Partners L.P. (CLMT) as good buying opportunities. These oil refining and marketing partnerships – sporting a Zacks Rank #1 (Strong Buy) – have solid secular growth stories with potential to rise significantly from current levels.
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