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Williams Companies (NYSE: WMB) recently announced an organizational realignment to streamline the company's MLP, Williams Partners (NYSE: WPZ), consolidating it from five operating areas to three in 2017. While the move will cut some costs, Williams' primary motivation is to refocus on the areas of its business that have the potential to drive future value creation.
Drilling down into the changes
Williams Partners' current operational divisions are Atlantic-Gulf, Central, NGL & petchem services, Northeast gathering & processing (G&P), and West. As the chart below shows, all five segments reported adjusted earnings growth in 2016 compared to the same period of last year:
Source: Williams Partners press releases. (Chart by the author. Note: In millions of dollars).
By early next year, Williams Partners' plan is to consolidate into the following operating areas: Atlantic-Gulf, West, and Northeast G&P. To do so, it will integrate its NGL & petchem services operations in the Gulf Coast with its Atlantic-Gulf assets, including the Geismar olefins plant that is currently undergoing a strategic review. Meanwhile, the company will merge its Central assets with its West assets, putting all of its assets west of the Mississippi and north of the Gulf Coast fall under that umbrella. Finally, its Northeast G&P segment will remain unchanged.
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What's driving these moves?
These changes will do several things. First, they will align Williams' assets into groups focused either on demand-driven growth or supply-driven growth. The bulk of the assets currently in the Atlantic-Gulf and NGL & petchem services segments are demand-driven assets. For example, the Atlantic-Gulf region's Transco interstate pipeline supplies natural gas to Northeastern and Southeastern states while the NGL & petchem services' Geismar plant consumes natural gas as a feedstock to make petrochemicals. Meanwhile, the Northeast G&P, West, and Central segments primarily house supply-driven assets that connect oil and gas producing basins to the market access points.
Second, the streamlining will focus Williams' supply driven growth on not just two regions, but two distinct commodities. Natural gas supplies in the Northeast from the Marcellus and Utica shale plays will continue to underpin the Northeast G&P segment. Meanwhile, oilier plays in Texas, the mid-continent, and the Rockies will be the focus of the combined West segment going forward.
Finally, the changes will reduce the company's overall cost structure and eliminate more of its cash-flow volatility. It's current cost reduction initiatives delivered $55 million in lower adjusted costs last quarter. This streamlining is an extension of those efforts. Additionally, the company will be reducing its reliance on assets that are directly impacted by commodity prices. For example, it recently sold its Canadian business, not only to reduce some of its direct exposure to commodity prices, but also to mute its foreign exchange risk. Meanwhile, its decision to explore the monetization of its Geismar plant could result in that asset transitioning into a fee-for-service business or being sold for cash. Lastly, it recently signed several agreements with Chesapeake Energy and a successor company to reduce some of the risks associated with its Central assets. These changes will provide much more stability to Williams' cash flow going forward.
Williams' decision to reorganize its operating areas is not just about simplification and saving money. Instead, the company is streamlining its segments to focus on what drives its growth so that it can capture additional opportunities. Further, it marks yet another step by the company away from the areas that caused the volatility that has been plaguing it over the past year.
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