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Morningstar | Williams Acquires DJ Basin Assets With Substantial Upside; FVE Unchanged Due to Small Size of Deals

We think Williams' portfolio repositioning is generally intelligent capital allocation, and garnering a foothold in the more attractive DJ Basin is a plus, in our view. Williams has acquired $1.2 billion of DJ Basin assets as part of a joint venture with KKR from TPG, while selling its Four Corners assets (San Juan and other New Mexico assets) for $1.1 billion to Harvest. We plan to maintain our fair value estimates and narrow moat ratings for the Williams entities as the transactions are too small to move the needle on our valuations. Interestingly enough, the transactions essentially modestly boost Williams' natural gas liquids exposure after the company largely sold off its assets in the space as part of strategic shift to focus more on natural gas.

Expanding in the DJ Basin looks like a smart move, given that we expect healthy growth prospects for gas and natural gas liquids production over the next few years, and Williams appears to have obtained a great price for its sold assets while acquiring assets that could prove to be very undervalued. Further, the acquired processing and pipeline assets have natural investment opportunities alongside Williams' existing assets in the region, which include the Overland Pass Pipeline and Conway fractionator. Overland Pass is currently maxed out or close to it from a capacity perspective, and we also believe there's opportunities to expand Conway NGL fractionation capacity (Williams owns 50% of a 100,000 barrel a day fractionator) given fractionation tightness at Mont Belvieu. These assets will provide the needed molecules for future investment. Finally, by selling the Four Corners assets at a great price, Williams has essentially prefunded its $600 million contribution to the DJ Basin transaction without needing to issue equity or debt, an issue that is top of mind with master limited partnership investors.

The downside is that Williams' price paid for the TPG's DJ Basin assets is likely fairly high.

Williams said the purchase price is about 5-6 times 2020 EBITDA when including $250 million in planned investment. We think this reflects the heavily consolidated nature of the basin in terms of midstream assets, with DCP Midstream and Western Gas Partners controlling the majority of the asset basin in the region. There's a shortage of midstream infrastructure in the basin, as DCP's processing plants had over 100% utilization in the first quarter. As a result, we think Williams is assuming fairly aggressive growth to lower the multiple, even taking into account the reduced multiple probably paid due to the noncontrolling stake, as DCP Midstream is building a similar-sized 200 million cubic feet per day plant in the basin for $300 million-$400 million. We're also wary that Williams appears to have likely acquired substantial intangible assets via the acreage dedication agreements, an area that can be tricky to value and where Williams has written off billions of dollars in the past.

Williams, as part of a joint venture with KKR, has agreed to purchase TPG's DJ Basin assets for $1.2 billion, which include 260 mmcf/d of gas processing capacity (complete and under construction), pipelines, and 260,000 acres of acreage dedication agreements. It will own just 50% of the venture after upping its initial 40% stake but will operate the assets and hold the majority of voting rights. Williams has the option to buy the remaining stake from KKR after six years at an undisclosed price.

The partnership also exited the Four Corners area in the San Juan and Rio Arriba counties in New Mexico for $1.1 billion. The assets sold include pipelines, processing plants, and a carbon dioxide treating facility. At a 13.7 times 2018 EBITDA multiple, this appears to be a great price for assets that were either in decline or somewhat stagnant.

For more on our NGL forecast, please see our July Energy Observer "The Natural Gas Liquids Rubik's Cube Solved."