2 Picks to Unlock Shareholder Value
Piyush is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Natural gas witnessed a boom in production, thanks to hydraulic fracturing and horizontal drilling that led to an oversupply in the market. With natural gas priced lower than its previous highs, it’s being considered as a cheap alternative for coal. Over the long term, natural gas also presents the possibility of replacing gas and diesel cars. In my opinion, investors looking to capitalize on the growing demand for the commodity should look to invest in these two companies.
William Companies (NYSE: WMB) is one of the largest energy infrastructure companies in the US involved in the production and transportation of NGLs, natural gas, and olefins. The company owns and operates nearly 15,000 miles natural gas pipelines in the North American region.
The company recently reached an agreement with William Partners (NYSE: WPZ) to sell 83% of undivided interest in Geismar NGL processing facility to the latter for about $2.364 billion. William Partners believes the acquisition to be accretive to its portfolio while William Companies could use the cash generated to undertake expansion projects. Geismar facility was experiencing a downturn that affected the company’s overall production in the last quarter. Also the furnace at the facility was damaged due to hurricane Isaac. Under the agreement, William Partners would be responsible for the expansion and repairing costs, translating into savings of at least $283 million for William Companies.
Adjusted quarterly net income came in at $0.25 against the expected $0.27 and $0.30 in the last year’s quarter. The fall in net income was due to lower NGL prices, as compared to last year’s quarter. I believe that with the sale of Geismar facility, it would be safe to expect improved profitability, as William Companies would now have reduced exposure to NGLs.
Hedge fund manager Andreas Halvorsen, holds 15.387million shares of William Companies in his $14 billion+ portfolio.
Kinder Morgan Energy Partners (NYSE: KMP) is the largest publicly traded pipeline transportation company in North America, structured as a Master Liability Partnership. The company owns and operates around 75,000 miles of pipelines and 180 terminals.
The company recently acquired Tennessee Gas Pipeline (13,900 miles) and half of the El Paso Natural Gas pipelines (10,200 miles) from Kinder Morgan (NYSE: KMI) for $6.2 billion. Analysts believe that the deal is a bargain for Kinder Morgan Energy Partners as KMI sold of its assets to reduce its debt burden.
The company’s quarterly cash distribution rate increased by 9%, and revenues rose by 10.7% YoY. The net income stood at $0.57 missing the street’s estimated $0.60. Since the company operates as an MLP, it is required to pass on bulk of their earnings to investors, in order to save taxes. The shares of Kinder Morgan Energy Partners yield a healthy 6.18%.
Kinder Morgan Partners was also involved in the divestment of its interstate gas pipeline, which fetched the company $1.8 billion in cash. Additionally KMP inked a deal with Phillips 66 to transport the latter's Eagle Ford crude to its Sweeney refinery in Texas. With new acquisitions to ensure surge in revenues and a high dividend yield, the stock has made it to the portfolio of Jim Simmons, with a holding of 417,700 shares.
Both companies have a Foolish Buy Rating, as they have performed well. With their recent divestments, they can use the cash from sale proceeds for expansion and acquisition purposes. In my opinion, both the companies have triggers to unlock shareholder value in the near term future and investors should look to hold both Kinder Morgan Energy Partners and William Companies.
PiyushArora has no positions in the stocks mentioned above. The Motley Fool owns shares of Kinder Morgan. Motley Fool newsletter services recommend Kinder Morgan. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!