BMO Nesbitt Burns puts speculative buy on Williams Cos. notes

New York, Sept 20 - BMO Nesbitt Burns put a speculative buy on The Williams Cos., Inc.'s notes, saying they should steadily increase in price as asset sales are announced.

Williams is looking to sell hard assets, management credibility is high and it owns plenty of other businesses which could also be sold if more cash is needed, BMO said.

From trading in the mid-30s during July because of concerns that the company was close to insolvency, the notes have already moved higher after the company negotiated secured bank financing and concluded two asset sales, noted BMO oil and gas analyst John White in his report on the company.

"Our Speculative Buy recommendation is based on the premise that the dollar price of the notes will move incrementally higher as each asset sale is announced, provided the prices received are reasonable," White added.

BMO quoted Williams' 9¼% notes due 2004 with $1.37 billion outstanding as trading at 78.5 recently for a yield to worst of 28.05% or a spread of 2,622 basis points and its 8 1/8% notes due 2012 with $650 million outstanding as trading at 70.5 for a yield to worst of 13.80% and a spread of 1,009 basis points.

Since the merchant energy sector was hit by liquidity problems and credit shortages earlier in the year, Williams has been moving to transform its business through a series of asset sales.

White noted that the businesses Williams has put on the block have the advantage of being hard assets in basic, infrastructure-type sectors such as refineries, natural gas gathering, storage and processing and petrochemicals, all in North America.

With management moving quickly, credibility is high, White said. And he noted that the company has interstate gas pipelines, a large midstream unit and exploration and production subsidiaries which could be sold if it needs to raise more cash.

White sees two principal risks: failure to monetize a significant portion of the gas and power trading portfolio and failure of asset sales to materialize as expected. On the trading portfolio, White assumed for his analysis no proceeds but said that failure to sell would likely send the notes lower while a successful transaction would remove "a good deal of uncertainty."

On the other risk, if the asset sales do not go according to plan it would take time to put a back up in place. Meanwhile the notes would move lower and the failure would "seriously jeopardize" the refinancing of Williams' $1.4 billion of 9.25% notes in 2004.

According to White's analysis, Williams should be able to raise enough cash from operations and asset sales to meet its obligations through 2003.

In the second half of 2002 he estimates the company will raise $3.509 billion of cash, $926 million from operations and $2.583 billion from asset sales. Capital expenditures, interest and debt repayment will use $2.103 billion of cash in that period. Williams would end the period with $2.694 billion.

For 2003, White estimates $1.503 billion of cash coming in, all from operations, and $3.065 billion going out, leaving $1.133 billion at the end of the year.

But the maturity of the 9¼% notes creates a problem in 2004, requiring refinancing of this debt.

White's calculation shows $1.551 billion of cash coming in, again all from operations, and $3.442 billion going out, leaving a $758 million gap.

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