Williams Companies: Growing $30 Billion Midstream Infrastructure Company

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About: Williams Companies Inc (WMB)
by: The Value Portfolio
Summary

Williams Companies' stock price fluctuates heavily with oil prices, despite the company's earnings consistently growing.

Williams Companies' primary asset is its Transco pipeline. This pipeline supplies gas to millions of households, along with supplying the gas for LNG exports.

Williams Companies is focused on a steady growth plan. The company has enough cash to pay its dividend, invest in future projects, and reduce debt.

Williams Companies (NYSE: WMB) is a $30 billion midstream infrastructure company that offers investors a dividend yield of almost 5%. The company has an impressive portfolio of assets, and despite an impressive asset composition, operates in a growing market. As we will see going forward, the company’s impressive and growing portfolio of assets make it a solid investment decision.

Williams Companies - The Street

Williams Companies Overall Strategy

Williams Companies has an impressive overall strategy that it is focused on executing. This strategy is part of what makes the company a great investment decision.

Williams Companies Overview - Williams Companies Investor Presentation

Williams Companies follows a volume-driven natural gas strategy to have low volatility in its earnings. Like all other midstream companies, the company focuses on take-or-pay contracts that result in it getting paid regardless of the volumes moving through its pipelines or the current oil markets. The company is a large-scale energy company with a $52 billion enterprise value, meaning it has $22 billion in debt.

The company anticipates 2019 gross margin to be 97% fee-based showing the strength of the company’s financials. At the same time, the company has met or exceeded adjusted EBITDA consensus each of the past 11 quarters. This shows the company’s financial strength. The company also anticipates an astounding $1.25 billion in excess cash available after dividends in 2019.

As an investment decision, Williams Companies has been focused on growth in a difficult nature. The company has anticipated almost 19% in adjusted EBITDA growth from 2017-2019 despite $3.4 billion in asset sales. The company has a current yield of almost 5.8% and has consistently offered more to investors versus the S&P 500 (NYSEARCA: SPY).

Williams Companies Assets - Williams Companies Investor Presentation

Williams Company has a diverse portfolio of assets. However, the company’s most important single asset by far is the Transco pipeline. The company paid $3 billion for this asset in a merger in 1994, which was roughly 25 years ago. The importance of this asset is also reflected in the fact that many of the company’s other assets are built off of its Transco pipeline.

As a result, there is a potential risk to pay attention to here. While the Transco pipeline is very important, it supports 7 million homes, any potential leak would be potentially devastating for Williams Companies. In fact, such a leak could have an impact equivalent to the BP Deepwater Horizon spill. While it is incredibly unlikely, it is worth paying attention to as a risk.

Natural gas demand is anticipated to continue to grow going forward. Demand increased by just 2.4% annually from 2012 - 2017. From 2017 to 2018 it increased by an astounding 10%. Going forward, from 2018 - 2023 demand is expected to grow by 4.6% annually. That continued demand will require additional pipeline capacity, meaning a huge opportunity for Williams Companies.

Williams Companies LNG Assets - Williams Companies Investor Presentation

At the same time, Williams Companies has an enormous portfolio of LNG assets that are growing rapidly. Export volumes are expected to grow significantly along the Transco states which will mean significant demand for moving natural gas through the pipeline. That natural gas movement will increase demand to expand the Transco pipeline, which will be a significant opportunity for the company.

Williams Companies Growth Projects

On top of Williams Companies’ impressive asset base, the company is undergoing a large number of growth projects.

Williams Companies Growth Projects - Williams Companies Investor Presentation

The company has been focused on a large number of demand and supply driven projects from 2018 to 2022 onwards. A number of these projects are in progress while another significant portion are under negotiation. These projects will provide the potential for significant and growing income for Williams Companies. That will allow the company to continue providing the returns it already has been providing.

Among these projects is the company’s Atlantic Sunrise project. This is the single largest project in Transco history and was placed in service just a few months ago. Williams Companies expects the project to provide significant EBITDA growth going forward. This shows how the company will be able to continue growing its earnings while divesting non-core assets.

The importance of the Atlantic Sunrise project was evident in how it affected prices. The day the project was brought online, it rose north-east gas prices from $1.2 to $2.7, a more than 100% increase. The Atlantic Sunrise project was a $3 billion project, and it’s incredibly exciting to see it finally come online. The project provides an impressive $420 million / year in consolidated fee-based revenue.

Williams Companies Rate Case - Williams Companies Investor Presentation

At the same time, Transco has filed for a rate increase in its pipeline. That rate increase is anticipated to provide an annual revenue increase of roughly $270 million. The company has proposed a 5-year more than $1 billion investment project to support this annual revenue. That proposed rate increase, which should come into play in March 2019, will help the company’s earnings.

The company has also recently sanctioned its Transco Project 2, which should provide access to new northeast supplies. The company anticipates overall, the project having 20+ expansion opportunities, as natural gas demand throughout the northeast corridor grows significantly. The company’s recent Transco projects have had attractive returns, which the company believes will continue.

Williams Companies Transco Revenue - Williams Companies Investor Presentation

The above shows Transco capacity and fee based revenue to increase significantly in the coming years. The company anticipates revenue growing from $2.2 billion to $2.7 billion in 2021. That means an almost 25% revenue increase in a mere 3 years, which is incredibly exciting to see. That revenue will translate directly to increased income for shareholders.

The company anticipates roughly $6.6 billion in growth capital along with an EBITDA margin of approximately 5.8x - 6.3x. As can be seen from my article on Kinder Morgan (NYSE: KMI), these returns are similar to the returns Kinder Morgan achieves on a growth capital. This shows how the majors are matching each other with strong earnings on large projects. These earnings will reward shareholders well.

Williams Companies Balance Sheet - Williams Companies Investor Presentation

Williams Companies has been focused on re-aligning its portfolio and plans $4.4 billion in asset sales from 2016-2018 to significantly reduce its direct commodity exposure. The company has been focused on significantly improving its debt profile from a almost 6x debt / adjusted EBITDA ratio to a 4.6x ratio. Long term, the company plans to keep it down to 4.2x debt / adjusted EBITDA.

This does mean the company has some additional debt to pay off. As said above, the company anticipated having $1.25 billion in cash available after dividends in 2019. Given the company’s total debt, such a ratio will be enough to reduce its debt / adjusted EBITDA ratio by roughly 0.25x per year. That means it’ll take the company till 2021 to get its debt to where it wants it.

At the same time, the company plans to continue investing heavily in long-term growth. The company plans to be disciplined, focused on ROCE, with $2.6 billion in growth capex for 2019. The company says that no equity issuance is required for this, and plans to use asset sales + dividends to fund the majority of this. As a result, I’d look for some asset sale investments in 2019.

Forecast

Williams Companies has a difficult time in the face of difficult oil prices. Despite being a midstream company with steady earnings, the company has seen its stock price fluctuate heavily with oil prices. For example, over the past 4 months the company saw its stock price drop by 25%, despite income remaining fairly constant in the face of dropping oil prices.

Going forward, the company has significant growth potential. The company’s Transco asset is its most impressive asset, and the company is focused on a number of expansion opportunities from this pipeline. LNG demand is expected to grow significantly and on top of this, demand is expected to grow from a growing population near the pipeline.

As a result, this shows how Williams Companies is a growing infrastructure investment decision.

Disclosure: I am/we are long WMB. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.