Crown jewel of U.S. shale behind the endless pursuit of Williams

Williams Cos. CEO Alan Armstrong has something everybody wants, and he knows it.

“It’s a gold mine,” he says. “It’s irreplaceable.”

Some 67 years after the Transco pipeline was laid from the Gulf Coast of Texas to New York City, it remains the crown jewel of the natural gas industry, fed by America’s richest shale patch. In the past year, the allure of this 10,500-mile system has helped trigger two failed takeover bids for Williams, a clash between Armstrong and billionaire pipeline magnate Kelcy Warren and a mass exodus from the company’s board.

Now, as Transco is re-engineered to flow south as well as north, investors are betting more takeover offers may follow. President-elect Donald Trump has promised a fossil fuel-friendly future, but opposition to energy projects is stronger than ever, adding value to systems already in the ground. And none can match Transco.

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“It’s probably the best natural gas pipeline in the U.S.,” said Rob Thummel, managing director at Tortoise Capital Advisors, a fund with a $572.5 million stake in Williams as of Sept. 30. The company is “a very, very attractive candidate.”

If there’s any pipeline company ripe to be bought this year, it’s Williams, said Jay Hatfield, a New York-based portfolio manager of the InfraCap MLP exchange-traded fund with $175 million in assets. It’s cheap — with shares that Hatfield estimates are undervalued by about 20 percent compared with peers. “Someone’s going to respond to that — you just don’t get that many opportunities,” he said. “Transco is a trophy asset.”

When asked recently whether he’d sell Transco, Williams’s Armstrong quoted a previous CEO who faced similar questions: “He said, ‘I bring an extra pair of shoes to the office every day, just in case somebody offers me enough for the pair I’m wearing.”‘

Armstrong went on to lay out a vision for Williams as a standalone company. It probably won’t buy new assets since it has enough growth projects, he said in a November telephone interview. That includes Atlantic Sunrise, a nearly $3 billion and 185-mile (300-kilometer) expansion of Transco in eastern Pennsylvania that Williams expects to place in full service next year.

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Instead, he said, the company’s focus will remain on transporting gas, capitalizing on gas export terminals along the Gulf Coast and gas-fired power plants in the east.

Transco’s route is what sets it apart. The line starts around Corpus Christi, Texas, feeding plants in the Gulf Coast before reaching Atlanta and Charlotte and ending up in New York. Along the way, it extends into the Utica and Marcellus shale formations that, in just six years, have emerged as America’s biggest gas-producing region.

And to think: It almost didn’t happen. The builder, Claude Williams (no relation to Williams Cos.), laid Transco after losing a bid on two existing systems. While both of those lines — built by the U.S. during World War II to bypass German U-boats sinking tankers — snake across the Midwest, Williams sent crews east of Appalachia and up the eastern seaboard to lay Transco.

“You couldn’t have picked a better path,” said Brandon Blossman, a Tudor Pickering Holt & Co. energy analyst.

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Flowing South

When Williams Cos. bought the system in 1995, Armstrong, who joined the company straight out of college, was dispatched from its Tulsa, Oklahoma, headquarters to expand operations in the region and ensure the system was well-fed.

Under his watch, Transco has grown to reach and deliver greater volumes of gas, sending the fuel south for the first time. Between 2008 and 2018, he will have doubled the gas Transco is capable of handling.

While expanding its pipeline network remains at the center of of Williams’s business plan, Armstrong hasn’t ruled out a previous proposal to roll its Williams Partners LP master-limited partnership back into the company. It’s a move that may make the company an easier target to be acquired, according to Matt Schmid, an analyst at Stephens Inc. Doing so could streamline the corporate structure and eliminate obstacles posed by having an MLP, a tax-advantaged entity that’s harder for outsiders to acquire.

Dead Deals

Lynn Good, CEO of power generator Duke Energy Corp., described Williams’s Transco line in a recent interview as an “incredibly strategic asset” and said her company’s one of its biggest customers. When asked if she’d like to own the line, she laughed: “You know, it’s owned by Williams today.”

Kelcy Warren, founder of Energy Transfer Equity LP, walked away from a takeover attempt of Williams in June after oil prices collapsed. The two companies are still battling in court over breakup fees. Within weeks, Jim Teague, CEO of Enterprise Products Partners LP, made his own bid — one that was rebuffed, by Enterprise’s account. That upset investors including activist Keith Meister of Corvex Management LP.

Meister was among six directors who left Williams’s board in July. In his resignation letter, Meister blasted Armstrong for what he described as “operational failures” that occurred on his watch and urged the board to hold him accountable for “any failure to execute” on a business plan.

For a look at how an activist crusade against Armstrong ended with board mutiny, click here.

Meister then waged a proxy battle that led Williams to add energy veterans to the board, including PPL Corp. CEO William H. Spence, former Pioneer Natural Resources Co. CEO Scott Sheffield and ex-Enterprise Products CEO Michael Creel. He’s urged directors to reconsider Enterprise’s takeover.

In September, Enterprise’s Teague said a potential deal with Williams appeared dead. A month later, he praised the rival’s system.

Given the challenges of laying pipelines today, he said, “I don’t think you build your way into that.”