Exxon Mobil Corporation (XOM), Chevron Corporation (CVX): Keep an Eye on This Energy Play

Exxon Mobil Corporation (NYSE:XOM)Williams Companies, Inc. (NYSE:WMB) is a company with almost 100 years of experience in the energy infrastructure sector. This track record has provided an advantageous position to connect natural gas and natural gas liquidsources to areas of increasing demand.

Given this condition, the firm offers one of the best long-term growth prospects within the segment. Its stock is expected to reach a target price of $49 within the next 12 months, which would represent a 32% potential gain in relation to the current price.

In this article, we will look into the main reasons to believe that Williams will outperform as expected:

The infrastructure

To face the growing energy demand in the U.S., a company must possess a well-established infrastructure and the resources to face further expansion. The Williams Companies, Inc. (NYSE:WMB) family, composed of Williams Companies, Williams Partners, and Access Midstream Partners has both.

Williams Companies operates in over 20 U.S. States and in Canada, and its integrated infrastructure assets include U.S.’ biggest natural gas distribution structure, Transco, the Marcellus/Utica extraction and processing complex with approximately 5 million dedicated acres, and Geismar, a 1.3b lb/yr olefins facility with increasing capacity.

In addition, the company has announced several organic growth projects, which would require an investment of over $15 billion (which will be executed by a highly experienced and reliable management team).

About $10 billion of the previously mentioned $15 billion will be allocated to Williams Partners for an organic growth program, oriented to the collection and processing of natural gas in the Marcellus and Utica shales, and the transportation to demand centers along the East Coast. This should boost Williams Partners’ gathering volumes and Transco’s (one of Williams franchise assets) transportation quantities.

Infrastructure existence and development is central to capitalizing growing energy demands. The scale and integration of Williams´ infrastructure and assets provide excellent expansion opportunities for years to come. Calculations indicate that their investment portfolio (partly described in the article) should generate 17.4% CAGR in dividends per share by the end of 2017.

The assets: Geismar´s unparalleled growth opportunities

Although Williams Partners and Transco would profit from the aforementioned capital investments, the main beneficiary would be the corporation´s olefin production facility, Geismar (one of the franchise assets, part of Williams Partners, which is the largest investment and source of cash flow -over 90%- for Williams Companies, Inc. (NYSE:WMB)).

The increase in the natural gas and NGL´s supply over the past years (ethane and propane, especially) have meant an outstanding widening of domestic olefins´ margins. These record surpluses are expected to remain stable during the next several years as supply remains sustainable.

Combined with these extraordinary margins, a 44% (600mm lbs) expansion, going on-line by the end of 2013, should increase Geismar´s EBITDA approximately 60% by 2015.

As a result of the investments, Williams Companies, Inc. (NYSE:WMB) is predicted to grow at 13.4% (CAGR, compound annual growth rate) the General Partner and Limited Partner unit distribution by 2017.

Exxon Mobil Corporation (XOM), Chevron Corporation (CVX): Keep an Eye on This Energy Play

Geismar’s growth is central to Williams Companies’ development, as the contribution of Geismar to Williams’ consolidated operating profit for 2013 is projected to be somewhere around 20%.

Strong potential in other assets

After Williams Partners, the largest investment and source of cash flow (6% of 2013 estimated cash flow) is Access Midstream Partners (ACMP), a best-in-class MLP expected to increase distribution 15% over the next few years. This growth would be “supported by gathering system build outs in rapidly developing shale plays (see above) and low-risk, cost-of-service contracts,” and would certainly contribute to Williams Companies´ organic growth.

As Access Midstream Partners is still in its early stages, and also putting in motion several organic growth programs, Williams Companies’ LP and GP distributions are expected to increase 28.1% CAGR by 2017.

Third in the line of cash flow sources (with 2% 2013E cash flow) is their integrated Canadian NGL’s business and a petrochemical pipelines platform that was recently purchased. The long-term project behind this is the interesting part: Williams plans to create an open-access NGL and petrochemical products duct net to provide olefins facilities along the Gulf Coast.

Although this project is still in the first stages of development, the assets could seriously contribute to the company’s cash flow and to Williams Companies’ assets overall integration.

Peer group comparison

Even though competing firms in the gas and oil exploration and  production like Exxon Mobil Corporation (NYSE:XOM) and Chevron Corporation (NYSE:CVX) provide over seven times the $1.37 earnings per share offered by Williams, and have historically paid greater dividends, with Chevron reaching even ten times Williams’ rates, P/E values reveal greater growth prospects for Williams that trades at 27.04x P/E, versus Exxon’s 8.88 x and Chevron’s 8.62.

Opposite to Williams, Exxon Mobil Corporation (NYSE:XOM) is trading at one of the lowest P/E, P/B, and P/S rates in its history, thus providing a good entry point, as shares are quite cheap in relation to the company’s assets and performance.

However, these assets also represent a threat, as their growth rate (14.6%) double the company’s revenue increases (7% CAGR 5 years), evidencing inefficient management. The same can be said about operating and gross margins, both considerably declining over the past few years. So, although dividend yield is relatively high, the stock price of $86.7 is close to the company´s historical maximum of $95, making of Exxon a not so alluring investment.

In addition, Exxon Mobil Corporation (NYSE:XOM) has the biggest asset base, which creates a challenge to achieve growth in both oil and natural gas production. Exxon has been reporting a disappointing production trend as its fourth quarter 2012 production level decreased 5.2% year/year. While an investor could buy Exxon at a much lower multiple than Williams, it will get a company that has reported six consecutive quarters of declining production growth.

Chevron Corporation (NYSE:CVX)'s case is not completely different, as the company's growth profile depends on upstream projects which have inherent risk factors. In addition, it has considerably increased its CapEx to $37 billion (7% higher compared to the amount that Chevron invested in 2012), one of the highest in the oil industry.

This creates a double risk: increased leverage and potential deterioration in its credit metrics. Chevron Corporation (NYSE:CVX) management is "growth oriented" and could see Williams as an acquisition target. Chevron's production outlook is one of the most promising in its peer group, with several interesting startups such as the Caesar/Tonga in the deepwater Gulf of Mexico. Buying Williams could provide Chevron one of the most promising natural gas infrastructures.

Foolish conclusion

Williams trades at a reasonable stock price and offers realistic growth prospects. It has one of the most promising natural gas asset bases which could be a serious acquisition target to big-cap oil companies such as Exxon Mobil Corporation (NYSE:XOM) and Chevron Corporation (NYSE:CVX).

The company is expected to post a solid dividend growth and enjoy the secular bullish trend for U.S. energy infrastructure.

The article Keep an Eye on This Energy Play originally appeared on Fool.com.

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