Before the start of trading on May 13, The Williams Companies, Inc. (NYSE: WMB) announced it would buy its limited partnership, Williams Partners L.P., which trades under the ticker WPZ. Shortly after this announcement, WPZ opened 20 percent higher and WMB opened up 5 percent. This did not surprise us, as we think it is part of a larger trend that we can expect to see grow in the coming months.
Before the start of trading on May 13, The Williams Companies, Inc. (NYSE: WMB) announced it would buy its limited partnership, Williams Partners L.P., which trades under the ticker WPZ. Shortly after this announcement, WPZ opened 20 percent higher and WMB opened up 5 percent. This did not surprise us, as we think it is part of a larger trend that we can expect to see grow in the coming months.
The Williams Companies’ recent purchase is an example of general partners consolidating LPs. By doing so, GPs can have one entity instead of two, a situation which creates many cost reductions, improved capital efficiencies and greater ability to make acquisitions. Once a GP completes the process of buying its LP, it will look to acquire other MLPs that fit its structure and growth objectives.
You can expect this consolidation to affect energy transportation needs. The U.S. previously imported oil and natural gas from other nations, which created the need for pipelines going from the shores into the country. However, the nation has shifted to producing its own energy and spreading it out, which has fueled a need for domestic infrastructure. MLPs provide these pipelines, and sometimes the quickest way for a firm to obtain the required infrastructure is to buy an MLP in the area where it wants to grow and then build that partnership up.
Basically, what we are seeing is that the GP buys an LP – which creates a larger entity – and then the next stage involves larger MLPs buying smaller ones.
During our investment selection process, we are looking for smaller MLPs that would be a good fit for the larger players – such as Kinder Morgan and The Williams Companies. More specifically, we are seeking smaller MLPs that hold strong growth potential and exist in areas where the more sizeable partnerships want to expand.
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