Is Williams' (WMB) Jackalope Deal With Crestwood A Win-Win?

Williams Companies (NYSE:WMB) recently announced the divestment of a 50% stake in Jackalope Gas Gathering Services in the Powder River Basin region to Crestwood Equity Partners LP (NYSE:CEQP) for 485 million. Crestwood, which already owned 50% interest in Jackalope system, now attains full control over the assets for a reasonable price. Notably, prior to the deal, Williams was the operator of Jackalope assets, while Crestwood was responsible for commercial services.

The deal, which is well in sync with the business plans of both Crestwood and Williams, enhances the sustainability of high-yield payouts of the firms.

The Deal Shores Up Williams’ Financials

Williams had been contemplating to offload Jackalope assets since last November and has finally sold the business to its joint-venture partner. The company plans to use the proceeds from the deal to trim its heavy debt load, which was $22 billion at the end of 2018, representing a debt-to-capital ratio of 60.5%. Further, by jettisoning these assets, the company will save around $90 million that it has planned to invest in this business. As Jackalope was not a significant asset in Williams’ portfolio, the divestment of these assets will not just help in strengthening its balance sheet, but also aid in portfolio optimization and investment in high-return expansion projects.

The deal follows another smart move by the company last month to form a joint venture with the Canada Pension Plan Investment Board (CPPIB) in a bid to optimize midstream operations in Marcellus and Utica regions. Williams will also utilize the cash proceeds from CPPIB for debt reduction.

The Deal Boosts Crestwood’s Position in Powder River Basin

While Jackalope was not a core asset for Williams, it is one of the most significant growth drivers for Crestwood. By acquiring the remaining 50% stake in the assets, the partnership positions itself to become one of the leading midstream players in the Powder River Basin.

The partnership expects the Jackalope system to generate $100 million of cash flows in 2019, which would increase to $150 million by 2021.Crestwood’s long-term contracts with Chesapeake Energy (NYSE:CHK) and other producers will support growth. As the partnership has now secured full ownership of the Jackalope business, it is looking to pursue additional opportunities, for instance, adding third-party customers in a bid to enhance long-term prospects in the region.

Post the deal, Crestwood projects 2019 net income in the band of $125-155 million and adjusted EBITDA within $500-$530 million.

Zacks Rank and Key Pick

While Williams currently carries a Zacks Rank #3 (Hold), investors interested in the same industry can consider TransCanada Corporation (TO:TRP) , which holds a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

TransCanada managed to surpass earnings estimates in each of the trailing four quarters, with average of 18.98%.

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