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Uncle Sam accidentally touched off an avalanche of energy merger announcements in the first half of 2018. All it took were two policy changes -- new corporate tax rates and tweaking a rule used to set prices for energy pipelines -- to erode the tax advantages for master limited partnerships (MLPs). As a result, many parent companies decided to roll up their partnerships under one roof.
Simpler organizational structures could yield significant benefits for individual investors. In addition to being easier to follow and understand, it will make it easier than ever to own some of the most important pieces of energy infrastructure in the United States. The proposed merger between Williams Companies (NYSE: WMB) and Williams Partners LP (NYSE: WPZ) is a great example, as it owns some of the best natural gas infrastructure in the United States. Here's why investors should be bullish on the multi-billion dollar merger.
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1. Improved financial flexibility
Williams Companies expects to receive a healthy increase in financial flexibility after rolling up the 26% of Williams Partners LP that it doesn't own. Timing plays a big role, as the parent will own 100% of the contributions from new growth projects coming online this year. For instance, the consolidated company's adjusted EBITDA is expected to leap to $4.55 billion in 2018, then to $5 billion next year.
That's expected to boost distributable cash flow (DCF) from a midpoint of $2.75 billion this year to a midpoint of $3.1 billion in 2019, allow the company to grow its distribution 10% to 15% both this year and next, and provide 170% distribution coverage next year. In fact, the excess cash available after paying dividends will be enough to cover more thanb half of growth capital expenditures slated for 2019. That makes Williams Companies well positioned to capitalize on the most important growth opportunity in natural gas.
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2. Top play on Appalachian gas growth
What the Permian Basin in West Texas and New Mexico is to the nation's crude oil production growth, the Marcellus and Utica shales in the Northeast are to the country's natural gas growth. Collectively referred to as Appalachia by some, the overlapping geologic formations are responsible for 41% of natural gas production from all of America's shale basins. That's what happens when a region increases total natural gas output by 16 billion cubic feet per day (Bcf/d) in a span of just five years.
But it may just be getting started. In the next five years, the Marcellus and Utica shales are expected to add up to 17.3 Bcf/d of natural gas production. That will help to fuel the expansion of industrial chemical production in the region and help the Southeast transition from coal-fired power plants to natural-gas-fired power plants. Few companies are better positioned to exploit the growth opportunity than Williams Companies.