Description

Based in Tulsa, OK, Williams is a diversified energy company with a market
capitalization of approximately $18 billion. Over the next several years,
we believe the company can grow earnings in excess of 20% per year due
to the increased demand for energy risk management services as a result of
deregulation.

Current Street EPS expectations for WMB are $2.30 and $2.60 for
2001 and 2002, respectively. With the spin-off of Williams Communication
now complete, investors can focus on a pure-play energy company. Based on
the Street consensus, WMB is trading at only 16.5x and 14.7x 2001 and 2002 estimates, respectively, a roughly 20%-25% discount
to peers such as El Paso, Dynegy, Duke, and Enron.

Importantly, we see considerable upside to the Street consensus largely
due to the company's energy marketing operations and believe that EPS
in the $2.75-$3.00 could be attained this year with profits in the
$3.50-$4.00 range in 2002. Pretax profits for WMB's energy marketing
operations were up 1200% in the year 2000 and an additional 320% in
the first quarter of 2001. The current Street consensus for
energy marketing profits in 2001 is between $1.2-1.3 billion
(compared with $1 billion in 2000), however, we believe earnings
between $1.5-2.0 billion are likely. First quarter profits
in the marketing business were $485 million implying business
would have to drop off sharply during the balance of 2001 to simply
reach the company's public guidance of $1.2-$1.3 billion.
Our conversations with top management of the marketing operations
suggest they are not seeing any slowdown. To put it in perspective,
every $100 million of pretax profits is worth $0.12-$0.13 per WMB share.
Earnings growth for this business will be driven by deregulation of
power markets, volatility in power and natural gas prices,
increasing demand for energy management services by utilities,
cooperatives and generators, and WMB's unique strategy of doing very
long dated structured contracts. Given our belief that the
wholesale power markets are just beginning to open up, we believe
the market for WMB's services will grow well in excess of 25% per
year for at least the next 5 years.

EPS Estimates P/E Multiples
Company Ticker Price -- 6/5 2000A 2001E 2002E 2000A 2001E 2002E
Duke DUK $ 42.50 2.10 2.47 2.76 20.2 17.2 15.4
Dynegy DYN $ 45.99 1.43 2.01 2.40 32.2 22.9 19.2
El Paso EPG $ 56.50 2.69 3.29 3.92 21.0 17.2 14.4
Enron ENE $ 53.75 1.47 1.79 2.11 36.6 30.0 25.5
WilliamsWMB $ 38.20 1.95 2.31 2.60 19.6 16.5 14.7
Average (ex - Williams) 27.5 21.8 18.6

Williams bull case$ 38.20 1.95 2.80 3.50 19.6 13.6 10.9

Catalyst