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
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. With his latest project, Private Briefing, Bill takes you "behind the scenes" of his established investment news website for a closer look at the action. Members get all the expert analysis and exclusive scoops he can't publish... and some of the most valuable picks that turn up in Bill's closed-door sessions with editors and experts.