A Buyout Makes Us Like This Energy Sector Pick Even More

A deal announced last week will see one Private Briefing company buying another - the 13th time one of our recommendations has become a "deal stock."

In this latest transaction, natural-gas pipeline company Williams Co. Inc. (NYSE: WMB) is buying up the portion of subsidiary Williams Partners LP (NYSE: WPZ) that it doesn't already own in a $13.8 billion all-stock deal.

This latest deal is part of a new trend in energy, one that will continue to create gains. Here's why.

"Immediate Benefits" for Our Pick

Energy expert Dr. Kent Moors recommended Williams Partners back in July 2013 - when it was Access Midstream Partners LP.

A subsequent deal transformed it into Williams Partners.

And today's transaction will make it part of Williams Cos., which Money Morning Chief Investment Strategist Keith Fitz-Gerald recommended to Private Briefing readers in late March.

Several years ago, energy firms broke themselves up into several pieces, including the "midstream" portion that consisted of storage and delivery operations (including pipelines).

But giant Kinder Morgan Inc. (NYSE: KMI) cut a deal last year that includes pipeline consolidation. And the move by Williams confirms that big energy infrastructure players are now steering away from the tax-advantaged corporate structure known as "master limited partnerships," or MLPs - which have been very popular with individual investors because of tax benefits.

The deal will provide tax benefits to Williams, but some of the partnership's investors could be hit with an unexpected tax bill when they exchange their partnership interests for company shares.

MLPs aren't subject to income taxes at the corporate level. And they disburse big cash distributions - in the form of dividends - that are usually untaxed unless investors sell the units.

Unfortunately, this kind of deal forces a sale - and thus an unexpected tax hit.

(The individual tax bill could vary, depending on when the investor bought his or her shares.)

Ironically, the deal - which is expected to close in the third quarter - will create tax benefits for the Tulsa, Okla.-based Williams.

Shares of Williams recently jumped 6.2% and are were up 8% since Keith recommended them.

Williams Partners, recommended largely for income, surged 22.7% and were up 23% since our recommendation (36% including dividends).

After the Williams deal closes, the combined company will be one of the biggest infrastructure players in the energy sector.

The consolidation deal opens the door to an interesting bookkeeping maneuver - allowing Williams to reset the clock on asset depreciation. The earlier deal - the aforementioned merger of Access and Williams Partners - was the preceding step to this.

"This strategic transaction will provide immediate benefits to Williams and Williams Partners investors," said Williams CEO Alan Armstrong.

The List of "Deal Stocks" We Recommend Keeps Growing Longer

[epom key="ddec3ef33420ef7c9964a4695c349764" redirect="" sourceid="" imported="false"]

And we'll continue to recommend the stock: If anything, we like the stock more now than we did just over a week ago.

Because it will be more efficient once the deal is done, the company is forecasting annual dividend increases of 10% to 15% a year through the decade's end.

Analysts are expecting additional simplification deals. Last week, Crestwood Equity Partners LP (NYSE: CEQP) - a smaller MLP - unveiled a $3.5 billion deal that will bring its MLP back "in house" and simplify its structure.

"If you need to be more competitive, you need to be focused on lowering cost of capital," Raymond James energy analyst Darren Horowitz told The Wall Street Journal. Williams is "thinking this is the right thing to do for the next 10 to 15 years," Horowitz said. "And I agree."

This is the 13th "deal stock" we've brought your way. Pharmacyclics Inc. (Nasdaq: PCYC) recently became our 12th deal stock, because of its proposed buyout by AbbVie Inc. (NYSE: ABBV).

That followed Freescale Semiconductor Ltd. (NYSE: FSL), LSI Corp., and such deal recommendations as Berry Petroleum Corp., Crosstex Energy Inc., Pentair Inc., Nexen Energy ULC (NYSE: NXY), CNH Global NV, Aurizon Mines Ltd., Trius Therapeutics Inc., Astex Pharmaceuticals Inc., and Smithfield Foods Inc.

Get Instant Access to Everything Bill Publishes: As the Executive Editor of Money Morning, Bill Patalon has access to investing strategies that are powerful and worth a fortune. And triple-digit gains like 101%... 122%... 160%... and 261% are not uncommon. And right now, he's looking at a little company that's poised to soar 201%. The stock is trading for under $10 a share right now but this won't last long. So don't wait. Go here for details.

About the Author

Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning at Money Map Press.

Read full bio