A spectacular bid for Williams Energy (WMB) came in last night from another pipeline powerhouse, Energy Transfer Equity (ETE), for an amazing premium of 35%. The $45 billion offer was rejected by Williams, as it has been rejecting more friendly overtures from ETE for months. The takeaway from this spectacular attempt to make an even more spectacular merger is that the pipeline companies are continuing to be clear winners in every U.S. oil environment.
One of the investment takeaways I offered in my new book, "Shale Boom, Shale Bust: The Myth of Saudi America," was that there were positional opportunities that needed to be considered, even during this down cycle of oil prices. One of the very few I highlighted was in the consolidation that was certain to emerge in pipelines.
The self-consolidation that occurred inside the Richard Kinder group of pipeline MLPs in August 2014 created a $71 billion behemoth and heralded the start of the rush for consolidation. Just as the independent shale players who are producing oil are going to have to get combined and have their assets restructured, so will the pipelines that carry that product from wellhead to refinery.
In the world of pipelines, much like in the world of oil, there is a never-ending appetite for expansion -- as oil and gas areas become hot with rigs and production increases, pipelines need to keep pace. But as areas begin to wane, those same pipes become less useful. New areas are always being sought and developed. And, also similarly to oil companies, particularly in moments of down markets as we are in today, the cheapest way to expand networks is through buying already developed infrastructure -- buying out other people's pipes.
For this missed deal, there's something even more unique going on -- Williams has been one of the most successful companies at finding southern, less-crowded niche pipeline markets and continuing to convert from an energy company into a pure pipeline play. A long-term chart look at Williams would convince anyone that, when it comes to mergers, Williams would be more appropriate as the buyer here of ETE, not the other way around.
Therefore, it's no wonder this deal will be roundly rejected, no matter what form it comes in, whether friendly or not. It is ETE that needs this deal, not only to expand its network south, but also to drop its master limited partner structure to make a direct conversion into a C-corp structure, just as Kinder has done with Kinder Morgan (KMI).
It is a move that Williams itself will do, eventually -- and it hardly needs Energy Transfer to tell it. Williams was undervalued before the deal and is undervalued by the offer.
I've owned Williams stock for years for my very long-term trust accounts, but not one I recommend now with the premium of the ETE offer.
Instead, have another look at my still best value in pipelines, the one that started the trend to begin with -- Kinder Morgan.
And let the other pipeline companies fall in line behind the master.