To the casual investor, investing any money in the energy sector today is a great way to watch your portfolio go up in flames. The slide in oil prices that started nearly a year ago has wreaked havoc on energy companies' earnings like Sherman's march to Savannah.
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Yet even in today's less than stellar market for energy investments, some of the biggest names in hedge funds have been plowing money into one particular energy stock: Williams Cos.. Let's look at why the investing minds of Wall Street seem to be going against the grain to load up on this company.
The Big Players Going After Williams
According to data from FactSet, hedge funds poured more than $600 million into shares of Williams Cos. in fourth-quarter 2014 (the latest numbers available). That influx of money meant various hedge funds owned more than 15% of shares outstanding, Here are some of the funds that have a large stake and have built on that position recently
|Hedge Fund||Market Value of WMB holdings||Recent additions||% of portfolio|
|Corvex Capital (Keith Meister)||$2.15 billion||-||22.98%|
|Soroban Capital Partners (Eric Mandelblatt)||$1.09 billion||-||8.07%|
|Fir Tree (Jeffrey Tannenbaum)||$690 million||+ 147%||6.25%|
|Oz Management (Daniel Och)||$507 million||+ 82%||1.2%|
|Third Point (Dan Loeb)||$207 million||+ 167%||1.62%|
Source: Insidermonkey.com and S&P Capital IQ.
Alsmost all of the firms listed above describe themselves as growth funds, so we're talking about investing in companies that are poised to do very well and reap big profits over the next couple years. Normally, that is not how you would describe a natural-gas pipeline company such as Williams. In fact, most pipeline companies are considered slow, steady dividend stocks that provide income. What separates Williams from its peers is that it is looking to grow revenueby leaps and bounds over the next several years with a $30 billion backlog in potential projects.
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Source: Williams Cos. Investor Presentation
The company estimates that these projects will increase EBITDA at its subsidiary partnership Williams Partners by as much as 40% from 2014 to 2017. This increase would increase distribution payments to the parent company by 12% annually over that time frame.
It's one thing to say a company will grow that much, it's a whole other thing to actually do it. One thing in Williams' favor is its strong asset base. Williams has one of the largest pipeline networks for the Marcellus and Utica shale formations, as well as the Rockies/West Coast markets, two regions that have historically lacked pipeline infrastructure and need increased access. Thanks to previous efforts to build out capacity in all of these regions,Williams has been able to develop a natural-gas transportation network that touches more than 30% of the nation's natural-gas production in some form or another. Only Williams and two other companies -- Kinder Morgan and Energy Transfer Partners move a similar amount of gas domestically -- have this sort of scale in the natural-gas world.
With so much need in these two critically growing regions, and with Williams' size and scale to fund that massive backlog, it becomes less surprising to see these growth hedge funds flocking to the stock.
What a Fool believes
Williams is by no means a cheap stock. The company trades at a total enterprise value-to EBITDA-ratio -- a ratio better suited for master limited partnerships and their general partners instead of the tried and true price to earnings -- of 27 times. That puts it far above not only the average TEV/EBITDA multiple ofits peers (about 15 times) but of the S&P 500 as a whole (about 12 times). Still, with that much growth coming Williams' way over the next few years, it's pretty easy to see why hedge funds are fond of this energy stock, and you might want to have the company on your radar as well.
The article Why Smart Money Loves This Energy Stock originally appeared on Fool.com.
Tyler Crowe has no position in any stocks mentioned.You can follow him at Fool.com under the handle TMFDirtyBird, onGoogle +,or on Twitter,@TylerCroweFool.The Motley Fool recommends Kinder Morgan. The Motley Fool owns shares of 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.
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