Williams Continues at Neutral

We are retaining our Neutral recommendation on Williams Companies, Inc. (WMB), to account for the company’s solid asset base, attractive growth opportunities and competitive positioning in major shale. These positives were fairly diminished by the weak natural gas projections, compelling Williams to cut 2010–2012 capital spending and earnings outlook.

Integrated energy firm, Williams’ exploration and production (“E&P”) segment has the potential to reap high growth and returns. Moreover, the rapidly developing midstream and pipeline business assets also complement the company’s expansion plans.

Williams recently acquired 42,000 net acres of land and is in the process of taking over another 8,000 net acres in northeastern Pennsylvania. With these acquisitions, Williams’ foothold in natural gas holdings in the Marcellus Shale doubles to approximately 97,000 net acres. We expect the company to capitalize the high growth opportunities in this region and benefit from increased natural gas production in the coming years.

The recently-concluded $12 billion restructuring program paved the way for Williams to combine its pipeline and processing units to create one of the largest natural gas companies in the industry. We believe that the consolidation allows Williams to simplify its structure, pay down debt, drive growth and unlock value for shareholders.

However, the bright perspective of the company got mellowed by the volatile natural gas prices and commodity-price weakness. These factors affected the company’s revenues, earnings and cash flow. Consequently, Williams trimmed its 2010–2012 capital spending and earnings guidance.

For full-year 2010, management expects adjusted earnings of $1.00 to $1.20 per share, down from the previous forecast of $1.00 to $1.45 per share. Adjusted earnings for the years 2011 and 2012 are expected to be in the range of 85 cents to $1.65 per share and 95 cents to $2.00 per share, respectively.

The company guided exploration and production capital expenditure of $1.2 billion and $1.3 billion for 2011 and 2012, respectively, which is also significantly lower than $2.0 billion likely to be expended in 2010.

As a company actively involved in acquisitions, Williams is considerably exposed to acquisition-related risks. The company may find it difficult to complete accretive transactions in the future, which may negatively impact its growth rate.

With an expectation that the company will perform in line with the broader equity market, we currently have a Zacks #3 Rank (short-term Hold rating) on the stock.

WILLIAMS COS (WMB): Free Stock Analysis Report

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