Wildcatters Portfolio holding Williams Partners LP (NYSE: WPZ) is trading sharply higher on news that parent and general partner Williams Companies (NYSE: WMB) is restructuring its midstream energy business and its two publicly traded master limited partnerships (MLP), Williams Pipeline Partners LP (NYSE: WMZ) and Williams Partners.

Under the terms of the deal announced this morning, Williams Companies will merge its two MLPs; the surviving entity will be Williams Partners LP, the partnership we recommend.

In addition, Williams Companies will drop down several midstream assets into Williams Partners, including its Transcontinental Gas Pipeline, the remaining 65 percent interest in the Northwest Pipeline and 24.5 percent in the Gulfstream pipeline. Other midstream assets being sold into Williams Partners include a range of gas processing and fractionation plants.

This deal is a transformative one for Williams Partners and Williams Companies. Williams Partners will now become one of the largest publicly traded MLPs in the US in terms of its base of assets and is much more diversified than the legacy MLP.

Specifically, the deal adds a number of stable, fee-based assets to the MLP that should help shelter the MLP from the volatility of its gathering and processing (G&P) operations. The deal also adds significant assets in the Marcellus Shale gas play in Appalachia, a region where significant growth in drilling activity and gas volumes is expected in coming years.

On Friday, Williams Partners was trading with a yield of about 9.7 percent, above the average yield for MLPs in the benchmark Alerian MLP Index. This higher yield reflects the higher risk implicit in the MLP’s G&P business. However, the restructured firm would be less risky because of its more diversified operations. This is why the stock is up sharply in early trading today.

The deal is immediately accretive to distributable cash flow, and the company announced that it plans to boost its quarterly payout to $0.6575 from $0.635 starting with its payout covering the first quarter of 2010. Note that this is not a boost for the next distribution payout, due in February, but for the following payment, likely to be in mid-May.  Management’s press release strongly hinted that further boosts to the distribution were likely as a result of the deal.

The deal is generally a major positive for Williams Partners. The MLP is currently trading above my buy target, but I’ll reevaluate our position on the stock this week in light of the deal.