From Market Realist
Williams Partners (ticker: WPZ), the midstream MLP subsidiary of Williams Companies (ticker: WMB), has announced the sale of its Geismar Olefins Plant to Nova Chemical for $2.1 billion. WPZ is the owner of one of the largest US natural gas pipeline networks.
The long-term agreement with Nova Chemicals is to supply and transport ethane to the plant on its Bayou Ethane pipeline. The sale has been discussed since the fourth quarter of 2016 as part of the MLP’s plan for a long-term sustainable natural gas–focused strategy.
The proceeds from this transaction would be mainly used for debt repayment and funding capital projects.
According to Alan Armstrong, Williams Partners’ CEO, “The Williams Olefins transaction and these announced new supply and transportation agreements fortify our focus on natural gas market fundamentals, reduce our commodity margin exposure and secure our fee-based Gulf Coast transportation business – all consistent with Williams’ strategy to allocate capital to its core, natural gas-focused business.”
Williams Partners’ market performance
Williams Partners stock rose 0.94% following the announcement. At the same time, the Alerian MLP ETF (ticker: AMLP), which is comprised of 25 midstream energy MLPs, was flat. WPZ has risen 7.8% since the beginning of 2017. In comparison, Boardwalk Pipeline Partners (ticker: BWP) has risen 4.8%, and Energy Transfer Partners (ticker: ETP) has fallen 1.5% in 2017.
How Williams Partners Expects to Benefit from Geismar Plant Sale
Williams Partners’ commodity price
The Geismar Olefins Plant sale is expected to lessen Williams Partners’ crude oil exposure. Its ethylene margins have fallen significantly compared to the levels before the rout in energy prices. US ethylene demand is expected to rise in the coming years, driven by a strong demand from the European and Asian markets. However, ethylene prices remain uncertain due to uncertainty in the price of crude oil.
Williams Partners will continue to focus on its fee-based NGL transportation and storage business. Enterprise Products Partners (ticker: EPD) and DCP Midstream (ticker: DCP) are among the midstream MLPs that are also bullish on strong NGL demand. For details on EPD’s expansion plans, read What Will Drive Enterprise Products Partners’ Growth?
According to Alan Armstrong, Williams Partners’ CEO, “When the Williams Olefins transaction closes, we expect to be at 97 percent fee-based revenues driven largely by natural gas volumes. Today’s announcements further strengthen our financial position to support Williams’ peer-leading, low-risk growth portfolio.”
Williams Partners’ leverage
High leverage has been a major concern for Williams Partners for quite some time. However, the situation improved following the asset sales and the financial reorganization plan announced at the start of 2017. Before the Geismar Olefins Plant deal, Williams Partners had completed the sale of its Canadian business.
About ~$850.0 million of the cash proceeds from the Geismar transaction will be used for term loan repayment, while the remaining amount will be used for funding capital projects. Fitch Ratings has signaled a credit rating upgrade following the completion of the Geismar asset sale.
Williams Partners earlier announced a target leverage ratio of less than 4.5x for 2017 after considering its $2.1 billion–$2.8 billion growth capital spending target for 2017. However, that might change in the company’s revised guidance, which WPZ expects to release on its Analyst Day on May 11, 2017.
