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What Does WPZ’s Valuation Indicate after Its 1Q17 Earnings?

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Williams Partners’ valuation

Williams Partners (WPZ) is currently trading at a price-to-distributable cash flow of 13.1x. The partnership is trading above the historical average of 7.7x. The sudden spike in WPZ’s price-to-DCF ratio is due to the dilution following the issuance of 289 million common units to Williams Companies under the financial repositioning plan.

Williams Partners’ EV-to-adjusted EBITDA[1. enterprise value to earnings before interest, tax, depreciation, and amortization] ratio using a trailing-12-month adjusted EBITDA is 13.3x. The current EV-to-EBITDA is slightly above the last nine quarters’ average of 12.1x.

The forward EV-to-EBITDA multiple, which is based on the next-12-month EBITDA estimate, is 13.0x. WPZ’s forward EV-to-EBITDA multiple is above the peer median of 11.1x.

WPZ’s higher valuation relative to its own historical valuation and peers could be supported by its significant natural gas–focused expansion opportunities, low commodity price exposure, improved leverage position, and strong presence in the prolific Marcellus and Utica Shale plays.

At the same time, the current valuation could be high considering its declining gathering volumes in some regions, recent distribution cuts, and low distribution coverage.

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Williams Companies’ valuation

Williams Companies’ EV-to-adjusted EBITDA ratio using a trailing-12-month adjusted EBITDA is 13.1x. The current EV-to-adjusted EBITDA is below the last eight quarters’ average. Moreover, WMB’s forward EV-to-EBITDA multiple of 12.7x is below the peer median of 12.9x.

WMB’s slight undervaluation relative to its own historical valuation and peers could indicate a buying opportunity, particularly considering its significant natural gas–focused growth opportunities and presence in the prolific shale plays.

However, the current valuation could also reflect WMB’s high leverage and the recent removal of IDRs (incentive distribution rights) from Williams Partners’ capital structure. The leverage situation is expected to improve after the sale of the Geismar Plant. Plus, the company is expected to benefit from a simplified organizational structure in the long run.

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