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Should You Hold Williams Companies (WMB) Amid Oil Rally?

We issued an updated research report on Williams Companies Inc. WMB on May 27, 2016. The company is a premier energy infrastructure provider in North America whose midstream properties provide it with a steady flow of revenues even when natural gas prices are low. However, Williams Companies' significant exposure to debt and weak commodity prices – although crude has started seeing momentum – keep us concerned.

This neutral view is reflected in the company’s current Zacks Rank #3 (Hold), implying that the stock will perform in line with the broader U.S. equity market over the next one to three months.

Williams Companies’ midstream assets, which are less sensitive to commodity prices, help it to maintain a steady stream of revenues and cash flow even if natural gas prices stay low.

It is to be noted that Williams Companies has been focusing on lowering overall costs amid low commodity prices. In fact, the company slashed 10% of its workforce by the end of the first quarter of this year. This reflects the company’s effective cost-control initiatives.

We also appreciate the company’s enhanced natural gas delivery capacity to Brooklyn and Queens by bringing its Rockaway Delivery Lateral and Northeast Connector projects online. This reflects Williams Companies’ objective to meet the long-term clean energy needs of New York City.

However, although crude crossed the $50-per-barrel level for the first time this year, the commodity is nowhere near its above-$100-per-barrel level two years back. This ongoing weakness has taken its toll on the volumes and distribution growth potential of Williams Partners, the company's largest income generating business segment. Moreover, we remain concerned about Williams Companies’ high debt level, which leaves it vulnerable to an extended drop in commodity prices. As of Mar 31, 2016, the company had long-term debt of $23,701 million, representing a debt-to-capitalization ratio of 81.3%.

On top of that, Energy Transfer Equity’s acquisition offer to Williams Companies, which was valued at $33 billion last September, is now dicey. Recently, Williams Companies filed a suit against Energy Transfer Equity to ensure that their merger remains on track as the latter expressed concerns over it citing that the deal had not secured the necessary legal opinion to make the transaction tax-free to its shareholders.

Stocks to Consider

Some better-ranked players in the oil production/pipeline sector include Enbridge Inc. ENB, Pembina Pipeline Corporation PBA and Columbia Pipeline Group Inc. CPGX. Enbridge and Pembina Pipeline sport a Zacks Rank #1 (Strong Buy) while Columbia Pipeline carries a Zacks Rank #2 (Buy).

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
WILLIAMS COS (WMB): Free Stock Analysis Report
ENBRIDGE INC (ENB): Free Stock Analysis Report
PEMBINA PIPELN (PBA): Free Stock Analysis Report
COLUMBIA PIPELN (CPGX): Free Stock Analysis Report
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