The Williams Companies (NYSE:WMB) is a midstream company that gathers, processes, stores, and transports natural gas and NGLs. Williams differs from other midstream partnerships because it is structured as a standard C-corporation.
At the August 3, 2023 closing stock price, the dividend yield for this $42 billion company was 5.2%. However, as is standard for asset-heavy pipelines, the company’s liability-to-asset ratio is steep at 71% and it has significant debt.
In the second quarter, cash flow nonetheless covered the dividend at 2.23 times. The company saw particularly good results from its Northeastern gathering and processing as Marcellus producers curtailed dry gas in favor of liquids-rich gas that requires more processing.
The approval and completion of Mountain Valley Pipeline has encouraged additional projects and gas transmission demand. Coupled with growth from LNG, electricity generation demand, and expansion of projects for its Transco, Trace Midstream, and MountainWest assets, Williams is well-positioned for continued steady, profitable growth.
I recommend The Williams Companies to dividend and growth investors.
Second Quarter 2023 Results and Guidance
For the second quarter of 2023, Williams’ net income was $547 million, or $0.45/diluted share, up 36% compared to Q2’22. Williams’ executives noted that this occurred despite the steep drop in natural gas prices of over 61%. This occurs because most of this midstream company’s profits come from gas transmission fees rather than gas production.
Adjusted net income was $515 million or $0.42/diluted share. Adjusted EBITDA was $1.611 billion, 5% higher than in Q2’22. Available funds from operations (AFFO) were $1.215 billion, and dividend coverage was 2.23x.
Guidance for 2023 remains the same as from the last quarter. The range incorporates 3Q hurricane uncertainty:
- adjusted EBITDA of $6.4-$6.8 billion.
- adjusted diluted EPS of $1.67-$1.92.
- growth capex of $1.6-$1.9 billion.
- net income of $2.1-$2.4 billion.
- AFFO (available funds from operations)/share of $3.86-$4.18.
Segments and Diversification
In 2022, 31% of the company’s adjusted EBITDA came from Transco. Transco is included in the 43% of 2022 adjusted EBITDA from transmission and deepwater. Gathering and processing comprised another 38% of 2022 adjusted EBITDA.
Acquisitions and Transco Projects
Williams acquired three significant assets during 2022:
- MountainWest Pipeline: 2000 miles of interstate pipeline systems with 8 BCF/D of transmission capacity located mainly in Utah, Wyoming, and Colorado, acquired for $1.5 billion ($1.07 billion cash and assumption of $430 million of debt).
- Trace Midstream: serving the Louisiana Haynesville and LNG export, expanding Williams’ gathering capacity in the region from 1.8 BCF/D to 4.0 BCF/D.
- NorTex: north Texas gathering.
These acquisitions are in addition to several expansion projects totaling 2 BCF/D underway on the Transco (Texas to New York) pipeline. Five of these projects do not depend on MVP coming online.
For the future, the company noted in its second quarter investor call a far-oversubscribed potential pipeline expansion serving Virginia, the Carolinas, and Georgia, resulting in part from the anticipated completion of the Mountain Valley Pipeline.
Natural Gas Production, Price, and Demand
The natural gas price at Henry Hub, Louisiana closed on August 3, 2023, at $2.56/MMBTU.
The chart below shows how much dry US shale gas production has increased, particularly in Pennsylvania, West Virginia, and Ohio. This is the increase that has surpassed available capacity and which Mountain Valley Pipeline should help get to market.
Interestingly, WMB made more than expected in its Northeastern gathering and processing segment: although producers (like Chesapeake (CHK)) curtailed production, they preferentially produced liquids-rich gas that uses the gas processing Williams offers.
Mountain Valley Pipeline is seen as being particularly important for the Pennsylvania Marcellus because regional spot prices there have trended lower due to the excess of supply over demand, compounded by a lack of pipeline takeaway capacity. As noted, some producers are curtailing their dry gas production. For example, on August 2, 2023, when the Henry Hub price was $2.43/MMBTU, the Mid-Atlantic price was only $1.15/MMBTU.
More generally, US natural gas prices are seasonally affected by demand for heat (direct burning) in the winter and the demand for gas-fired electric generation and the demand for cooling (again natural gas-fired generation) in the summer. Although mitigated by storage and substitutes, transmission volumes tend to follow these demand patterns.
In their investor presentation, Williams executives noted big upticks in gas demand and gas transportation demand due to:
- a potential doubling of LNG export capacity within three to four years.
- the onshoring of more petrochemicals manufacturing (like ammonia produced by CF Industries (CF)).
- the requirement for fast-on fast-off gas (peaker) unit electricity generation to back up intermittent renewables (gas capacity is needed at 1.1:1 ratio to renewable capacity).
- the use of gas to replace coal and more generally operate as a baseload fuel for electricity generation.
- the growth in the use of electricity for data centers, electric vehicles, and the “electrification of everything.”
As an example of the importance of gas in generating electricity, Williams cited last a highest-ever daily use of 53 BCF/D of gas just to generate electricity last week. And even then, the PJM mid-Atlantic region had to declare power emergencies due to insufficient generating capacity. California’s largest fuel for electricity generation? Natural gas.
Typical US gas demand is about 100 BCF/D. Demand by category last week is shown below.
Competitors and Regulation
The Williams Companies is headquartered in Tulsa, Oklahoma.
Pipeline companies do not compete head-to-head: projects are not built until long-term volumes are committed. Moreover, because it is difficult to build new pipelines, legacy pipelines like Williams’ Transco are a potent barrier to entry. Similarly, the company’s acquisition of MountainWest allows it to serve the key west coast markets; others are unlikely to build new lines in the Rocky Mountains. Still, in some areas (west Texas, Louisiana) different companies, or company consortia, may offer competitive potential and actual pipeline projects.
Williams also competes and cooperates with intrastate pipelines and gathering systems.
WMB is operationally regulated at the national or interstate level by the Federal Energy Regulatory Commission (FERC) and the Environmental Protection Agency (EPA) and at the state level by the local authorities of the states in which it operates.
Yet energy security and thus regulation is also a federal issue. This can be seen in the recent special Congressional approval to complete Mountain Valley Pipeline. Ongoing resistance to pipelines is apparent from the US Fourth Circuit’s rejection of that Congressional approval. In July 2023, the Supreme Court’s overruled the Fourth Circuit. Completion of MVP will proceed.
On August 1, 2023, Institutional Shareholder Services ranked Williams’ overall governance as 2, with sub-scores of audit (5), board (1), shareholder rights (6), and compensation (1). In this ranking a 1 indicates lower governance risk and a 10 indicates higher governance risk.
At January 2023, Williams’ ESG ratings were medium with a total risk score of 24 (39th percentile). Component parts are environmental risk 10.0, social 10.4, and governance 3.1. Controversy level was moderate at 2 on a scale of 0-5, with 5 as the worst.
As of July 14, 2023, shorts are 2.8% of floated shares. Insiders own a small 0.36% of shares.
Beta is 1.18; this reflects increased gas price and regulatory risk but is only moderately above the overall market’s volatility.
At March 30, 2023, the five largest institutional holders of The Williams Companies’ stock were Vanguard (10.6%), Blackrock (9.9%), State Street (7.0%), Bank of America (3.85%), and Dodge & Cox (3.2%). Some institutional fund holdings represent index fund investments that match the overall market.
Two of the top five Williams shareholders – Blackrock and State Street – are signatories to the Net Zero Asset Managers initiative, a group that, as of June 30, 2023, manages $59 trillion in assets worldwide. Despite the disruptions of Russian energy supplies, reduced crop production, and resulting economic hardship globally, NZAM limits hydrocarbon investment via its commitment to achieve net zero alignment by 2050 or sooner.
Financial and Stock Highlights
Williams Companies’ market capitalization is $42.0 billion at an August 3, 2023, stock closing price of $34.44 per share. Its enterprise value is $65.5 billion.
The dividend of $1.79/share yields 5.2% at the August 3, 2023, closing price. WMB also has an opportunistic share buyback program underway.
At June 30, 2023, Williams had $34.8 billion in liabilities, including long-term debt of $21.5 billion, and another $2.9 billion of long-term debt due within a year. With $49.0 billion in assets this gives a liability-to-asset ratio of 71%. Average debt maturity is 11.2 years.
The company’s ratio of debt to market capitalization is 0.58. The debt-to-EBITDA ratio is 4.3.
Average analyst rating is 1.9, or “buy,” from 19 analysts.
Notes on Valuation
The company’s book value per share at $9.57 is less than a third of its market price, implying positive investor sentiment.
However, its ratio of enterprise value to EBITDA is 11.5, so does not imply a bargain since the ratio above the range of 10.0 or less.
Positive and Negative Risks
Due to its high level of debt and large capital expenditure program, Williams also has inflation risk in materials, labor, and capital cost.
Activist and regulatory resistance to building or even expanding pipelines is ever-present. This includes risk from environmental activists who advocate for against all hydrocarbons, groups that oppose pipeline rights of way, as well as anti-hydrocarbon federal and state policymakers and regulators.
However, as seen with the construction of LNG and regas terminals globally after the Russian invasion of Ukraine and the use of natural gas to back up renewables as well as generate baseload electricity, resistance has decreased. Reality bit. Europe and Asia were very short of natural gas in 2022. The US faced high gas prices through early 2023.
Recommendations for The Williams Companies
While not a value proposition, Williams is recommended to dividend hunters with its 5.2% dividend return, more than competitive with the returns on US Treasuries.
Given Williams’ debt and large capital programs, it is exposed to inflation in interest costs (71% liability-to-asset ratio), labor, and materials, as well as supply chain shortages.
Still, the company’s revenues are fee-based rather than commodity-based and its profitability reflects that steadiness.
It is geographically diversified, with operations in the southeast, Florida, Gulf Coast, offshore, and Rockies. It is serving and is well-positioned to grow with the expected doubling of the US LNG export sector, the significant increase in gas generation of electricity, the relief afforded by the completion of Mountain Valley Pipeline, more gas processing in Appalachian fields, and increased use of gas in petrochemical expansions.
With electricity in particular, not only is the electricity market itself growing, but gas’ share of generation is growing as it a) displaces coal in baseload operations, b) remains affordable for existing baseload, and c) backs up intermittent renewable capacity with flexible peaking plants on what is likely to be a 1:1 basis.
I recommend The Williams Companies stock to dividend and growth investors.