2023-08-29 03:13:20 ET
Summary
- Williams Companies' guidance looks very conservative given its 1H results and typical seasonality.
- WMB has attractive growth projects and trades at a valuation in line with other midstream operators.
- I expect the stock to continue to perform well.
Back in April , I wrote that Williams Companies ( WMB ) had one of the most valuable assets in the midstream space in the Transco Pipeline and that I thought it had plenty of dividend growth in front of it. With the stock returning nearly 20% since then, let's catch up on the company and its most recent earnings report.
Q2 Results
Earlier this month, WMB posted solid Q2 results, with adjusted EBITDA up 8%, or $115 million, to $1.61 billion. Adjusted EPS was 42 cents, up 5%. Gathering volumes rose 6% year over year.
WMB's Transmission & Gulf of Mexico segment saw its adjusted EBITDA rise 14.7% to $748 million. The results were helped by its MountainWest and NorTex Midstream acquisitions, as well as increased production in the Gulf of Mexico from new Taggard wells.
Adjusted EBITDA for its Northeast G&P segment climbed 14.4% to $515 million. The results were powered by increased gathering rates and volumes. Its West segment, meanwhile saw adjusted EBITDA rise 5.4% to $312 million, helped by higher Haynesville volumes and gains on nat gas hedges.
Its Gas and NGL Marketing Service segment saw adjusted EBITDA of -$16 million versus $6 million a year ago. The segment is seasonally sensitive, and was hurt by lower commodity prices.
WMB generated $1.377 billion in cash flow from operations, up 25% versus a year ago. Available fund from operations rose 8% to $1.22 billion.
The company ended the quarter with leverage of 3.5x. It had a dividend coverage ratio of 2.2x. It also bought back $56 million in stock in the quarter.
Overall, WMB posted a very solid quarter despite weak nat gas prices, showing the importance of its largely demand-pull assets. I was particularly impressed with its results out of the Haynesville, given that drilling in the area has slowed down significantly. Interestingly, management noted that the U.S. saw record natural gas power demand in July, showing the importance of natural gas even as renewable energy sources gain more traction.
Outlook
Looking ahead, the company guided for full-year adjusted EBITDA of between $6.4-6.8 billion. It is looking for adjusted income of between $2.05-2.35 billion, or $1.67-1.92 per share.
WMB has project available funds from operations of $4.725-5.125 billion. AFFO per common share is projected to be between $3.86-4.18. It expects its coverage ratio to be between 2.16-2.34x.
It is looking to end the year with leverage of 3.65x, and to grow its dividend by 5.3% for the year.
The company is projecting between $1.6-1.9 billion in growth capex.
Discussing growth projects on its Q2 earnings call , CEO Alan Armstrong said:
We're pleased to announce that we've already secured binding precedent agreements to support a significant expansion on the newly acquired Overthrust pipeline. This project was not even in our upside case for this investment and the team has identified even more growth to come that is beyond our original expectations. Much of this growth is centered around coal to natural gas conversions in the Western states. On Transco, we continue to advance our emission reduction program and recently completing completed our first large-scale compressor replacement project in Virginia. Our backlog of high-return pipeline expansion opportunities continue to progress, driven by a large wave of incremental demand that continues to exceed our expectations. As evidence of this continued wave of increasing demand, we recently concluded a nonbinding open season to advance another large-scale Transco project that will provide much needed capacity to serve our customers south of Station 165 in Virginia. Our customers' requested capacity that has been well in excess of the 800,000 dekatherms per day that we offered. Importantly, the minimum required term for this service offering was 20 years. This underscores our belief in the durable and fast-growing demand for capacity and the market's confidence in our ability to deliver this capacity with the lowest environmental impact, following the approval of the Mountain Valley Pipeline. We're now working to find a way to serve as much of our customers' needs as possible and hope to have an update on this exciting project soon."
Given its strong first half, WMB's current forecast appears very conservative. Typically, the company sees seasonally stronger 2H results vs first half, and after posting $3.4 billion in 1H adjusted EBITDA, it is looking for lower to the same EBITDA in the back half. Now the company noted it could see a hurricane or lower nat gas prices, but the latter seems unlikely as nat gas prices typically rise during the fall and winter.
Overall, WMB appears to have set a pretty low bar, which should lead to some nice quarterly beats in the back half of the year. That's a nice set-up. It also is seeing more attractive growth projects, which is also important.
Valuation
WMB trades at 9.6x the 2023 EBITDA consensus of $6.67 billion. Based on the 2024 EBITDA consensus of $6.75 billion, it is valued at 9.4x.
The stock has an attractive free cash flow yield of about 9.7% based on my 2023 projections calling for $4.1 billion in FCF. The stock has a yield of about 5.2%.
WMB trades towards the middle where other large midstream operates are currently trading. Equitrans ( ETRN ) is trading more based on when its MVP pipeline comes online, which is why it is at a higher valuation. I recently wrote about it here .
Conclusion
While WMB is not the cheapest stock in the midstream space, it owns valuable demand-pull assets with largely fee-based contracts, has a great balance sheet, and a plethora of nice growth projects. Its 5.1% yield certainly isn't one of the largest in the space, but that's still a nice return for a more growth-oriented midstream operator.
While I prefer some other cheaper midstream companies in the space, I continue to think WMB deserves a place in many investors portfolios. My "Buy" rating and $42 price remains unchanged. That price target is an under 11x multiple on 2024 EBITDA.
For further details see:
The Williams Companies: H2 Guidance Looks Conservative Given H1 Report And Seasonality