Morgan Stanley Resumes Coverage On Williams Companies At Equal Weight

Morgan Stanley’s Tom Abrams believes the valuation of Williams Companies Inc WMB has become attractive following the termination of the merger with Energy Transfer Partners LP ETP.

Abrams reinitiated coverage of Williams Companies with an Equal-Weight rating and price target of $24.

Attractive Valuation

“Williams is faced with developing a strategy as an independent entity after being locked up in merger discussions over the past 18 months. It has a full plate in determining the correct GP/LP structure, potentially resetting the div/distr, and business mix policies over the next several quarters as the company grapples with a path of independence,” the analyst noted.

Related Link: Goldman Says Williams Cos. Dividend Cut Is Priced In, Reinstates At Buy

Although the valuation is attractive on the basis of the current yield, the analyst believes that the uncertainty associated with several issues and lack of visibility should add to the risk.

Abrams believes improvement in the company’s debt metric and cost of capital are among the most important factors that will provide stability to Williams Companies, with a variety of strategic options available.

Execution Is Key

“However, given the scope and magnitude of these options, execution remains key to driving valuation metrics more in line with the broader group,” the analyst stated.

Abrams also pointed out that the company has among the most expansive and high growth natural gas pipeline systems in the United States, which had the potential to drive meaningful cash flow growth over the next few years.

However, the impaired cost of capital, combined with headwinds across several legacy businesses, is likely to result in lower growth and concerns regarding the foreseeable future.

Success of Williams Companies’ long-term growth initiatives will be “largely dictated by the pace of new project development and volume growth in the Northeast, coupled with rectifying its cost of capital to accretively finance projects,” Abrams added.

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