The Williams Companies (WMB), like other pipeline and midstream companies, represents a sort of hard-asset long-term arbitrage (infrastructure) on location differentials. Williams differs from other midstream companies, most of which are publicly-traded limited partnerships, by having simplified to a standard C-corporation, a format some investors prefer.
At the current stock price, the dividend yield is a very competitive 5.5% and the one-year target price offers a potential 15% upside.
What makes midstream companies different from a financial arbitrage instrument is that before getting rights-of-way and building multi-billion dollar pipelines, the companies get long-term commitments from suppliers. If an insufficient volume of commitments is obtained, the pipeline is not built.
While pipeline companies have typically operated like regulated utilities, investors should be aware that many face bigger issues than in the past in getting new rights-of-way (ROW). This is especially the case in the east and northeast U.S., one of the regions where Williams operates.
Yet as electric generation uses more gas and as liquefied natural gas exporting accelerates, the demand for gas and natural gas liquids (NGL) gathering, processing, storage, and transport will continue increasing.
Brief Company Summary
The Williams Companies, founded in 1908, is a Tulsa, Oklahoma-headquartered midstream company that gathers, processes, stores, and transports natural gas and NGLs. The company employs 5,300 people full-time. With a June 7, 2019 closing stock price of $27.76/share, its market capitalization is $33.6 billion.
Henry Hub Natural Gas Futures Prices ($/million British Thermal Units, MMBTU)
Credit: macrotrends.net (left axis is log scale)
Gas Production and Prices
The June 7, 2019 natural gas price closed at $2.34/MMBTU at Henry Hub, Louisiana. The first graph shows the enormous expansion in U.S. shale gas production. The next chart shows the “national” futures index price — gas at Henry Hub. The third, which approximates a Marcellus (Pennsylvania) field price, has been stretched to the same one-year time frame. Note that the national graph shows prices of $2.30 to $4.80 per MMBTU, but the local Marcellus field prices, while reaching about $4.50 per MMBTU, dipped below $1.00 per MMBTU last fall and generally are $0.50/MMBTU lower than the national prices.
This is the clearest indicator of the excess of supply over transport capacity in the Marcellus field, and also is suggestive of the consequences of the “no-pipelines” stance of the state of New York, for example. Pennsylvania and Ohio gas has otherwise seemed a good fit to Northeast winter heat and electric generating requirements, but some states' resistance to new pipelines continues to block access to this low-carbon, low-priced source of energy.
Williams divides itself into three operating areas: Atlantic-Gulf, Northeast, and West. The map above illustrates operational locations. The Atlantic-Gulf region contributed about 46% of first quarter 2019 earnings, the Northeast contributed 25%, and the West contributed 29%.
The Williams Partners Merger
A little less than a year ago on August 10, 2018, the Williams Companies bought back all of (subsidiary) Williams Partners' units it didn’t already own, streamlining its corporate structure.
Pipelines do not compete head-to-head precisely: projects must be approved by regulators and that process doesn't start until long-term volumes are committed. Still, in an area like Pennsylvania or the Permian Basin in west Texas and eastern New Mexico, different companies, or groups of companies, may offer different potential projects. Hart Energy lists fifty midstream companies, and Williams holds the sixth spot when ranked by 2018 EBITDA. Similar-sized companies include publicly-traded limited partnerships like Energy Transfer LP (ET), Plains All American (PAA), and Targa Resources (TRGP).
Williams is regulated at the national or interstate level by the Federal Energy Regulatory Commission (FERC) and at the state level by the local authorities of the states in which it operates. Sometimes, as with the proposed Constitution pipeline project, the two conflict.
Strategy, Capital Expenditures, and Growth
Per Williams CEO Alan Armstrong, Williams completed the Gulf Connector, Fort Lupton III, St. James Supply and work on Shell’s (NYSE:RDS.A) (NYSE:RDS.B) Norphlet projects and will begin receiving cash flows from them.
One proposed project is the 400 million cubic foot/day (MMCF/D) Northeast Supply Enhancement (NESE); however, despite distribution company readiness and demand from residential customers — with Consolidated Edison (NYSE:ED) even saying it will stop gas hookups in new houses without more gas supply — regulators in both New York and New Jersey have stalled the project. Williams is optimistic NESE will ultimately proceed.
State authorities in New York have also stalled the Constitution natural gas pipeline, which Williams is proposing to build in partnership with Cabot Oil and Gas (COG), Duke Energy (DUK), and Canadian company AltaGas (OTCPK:ATGFF).
The company is entering into a joint venture in the Marcellus/Utica basins with the Canada Pension Plan Investment Board later in the year, from whom they will receive $1.3 billion. Williams also received $485 million from Crestwood Equity Partners for the sale to Crestwood of its 50% interest in Jackalope Gas Gathering Services.
On the first-quarter conference call, CEO Alan Armstrong also said that he expects 5-7% annual growth in adjusted EBITDA over the long term. It will reach this goal in part by investing $2.5-$3.0 billion each year on expansion projects.
More generally, LNG export volumes will grow by 13.4 billion cubic feet/day (BCF/D) from states served by Williams’ pipelines. Just as important, the largest amount of new power generation projects — nearly 20,000 megawatts of nameplate capacity — is slated to be fueled by natural gas. Gas continues to displace coal for power generation as utilities reduce their carbon intensity.
At April 1, 2019, Institutional Shareholder Services ranked Williams’ overall governance as a 3, with sub-scores of audit (1), board (2), shareholder rights (5), and compensation (3). In this ranking, a 1 indicates lower governance risk and a 10 indicates higher governance risk.
As of mid-May 2019, shorts are 2.2% of floated shares. Insiders own only 0.13% of shares.
Financial and Stock Highlights
Williams Companies’ market capitalization is $33.6 billion at a June 7, 2019 stock closing price of $27.76 per share. Its enterprise value is $58.6 billion.
The company’s trailing twelve months’ earnings per share (EPS) is -$0.11. Its forward average of analyst estimates for 2019 EPS is $0.89, resulting in a steep forward price-earnings ratio of 31. Investors should note that while Williams made the first-quarter EPS expectation of $0.22/share, it missed on the three prior quarters, by amounts from -$0.02/share to -$0.34/share.
Williams’ 52-week price range is $20.36-$32.22 per share, so its June 7, 2019 closing price of $27.76 is above mid-range and 86% of its one-year high. The company’s one-year target price is $32.00/share, so its June 7th closing price is 87% of that level. Put another way, its current price gives a 15% upside to its one-year target price.
Trailing twelve-month return on assets is 2.7% with a minimal return on equity of 0.87%.
At the end of the first quarter of 2019, the company had $24.87 billion in liabilities plus deferred income tax and regulatory liabilities of $5.37 billion and $45.97 billion in assets giving The Williams Companies a liability-to-asset ratio of 66%. Its ratio of current assets divided by current liabilities is 0.3, well below the desirable minimum of 1.0. The company’s reported cash and equivalents were only $43 million at March 31, 2019.
Williams’ trailing twelve months’ operating cash flow was $3.37 billion and levered free cash flow was -$646 million.
However, the company’s CEO explained on the first-quarter call that due to significant asset sales, the company would be receiving more cash during the second quarter and so the liability-to-asset ratio will improve.
In the first quarter of 2019, Williams’ total revenues were $2.05 billion and its net income was $194 million, or $0.16/share. This compares to first-quarter 2018 revenues of $2.09 billion, net income of $152 million, or — with a one-third smaller number of shares — earnings per share of $0.18.
Note that the company’s guidance for 2019 net income is $1.1-$1.4 billion, which translates to EPS of $0.83 to $1.07.
The company’s beta is 1.46; this heightened volatility is more than what has been standard in the past for midstream companies, although it reflects increased regulatory and NIMBY (not-in-my-backyard) risk.
Williams’ dividend is $1.52/share, thus providing a 5.5% yield.
Overall, the company’s average analyst rating is 1.7-1.9, or “buy” leaning toward “strong buy” from the 19 analysts who follow it.
At March 30, 2019, the six largest institutional holders of Williams' stock are BlackRock (11.0%), Vanguard (8.0%), State Street (4.8%), Tortoise Capital Advisors (3.1%), Harvest Fund Advisors (2.9%), and Franklin Resources (2.5%). Some institutional fund holdings represent index fund investments that match the overall market.
Notes on Valuation
The company’s book value per share at $11.87 is 43% of its stock share price, implying positive growth and profitability sentiment.
Positive and Negative Risks
Although the big shortages of gas, NGL, and oil pipeline capacity make it seem remote, there is always the risk in midstream infrastructure — as with petrochemicals — of overbuilding new capacity. As noted, this tends to be offset by a project finance approach which requires securing long-term transport commitments from shippers. Indeed, it is sometimes the case that the shippers themselves joint-venture with pipeline companies to build a new project.
Activist and regulatory resistance to building or even expanding pipelines has increased substantially in the past few decades. This includes risk from activists who propose that there be no hydrocarbons whatsoever, as well as groups that oppose pipeline rights of way. Texas and Louisiana state legislatures have responded with bills that increase punishments on people who interfere with the operations or safety of pipelines.
Recommendations for The Williams Companies
With its current 5.5% dividend yield, I recommend The Williams Companies' stock to dividend-seeking investors.
With the huge growth in domestic gas, NGL (and oil) production as well as demand for gas in LNG exports and the big switch to using gas instead of coal to generate electricity, the midstream sector as a whole is on a good growth trajectory. Investors interested in this sector who prefer stock shares to publicly-traded limited partnership units should also consider The Williams Companies.
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