Summary
- The Williams Companies posted strong performance in the latest quarter, driven by volume growth and strong commodity prices.
- The company has several upcoming growth projects that are expected to drive earnings growth in the coming years.
- The stock offers an attractive dividend yield, with payments well-covered by available funds from operations.
Investment Thesis
The Williams Companies ( WMB ) is well-positioned to meet the growing need for the supply of natural gas across sectors. The company has allocated $250 million to new energy businesses and has various projects in the pipeline which will create new opportunities in the coming years. Williams has shown solid performance over the years and should continue to do so in the future too, driven by higher demand for U.S. LNG exports, as well as demand from domestic markets. The commodity price increase, volume growth, and expansion projects should support the company's growth in the coming years.
Operations
The Williams Companies is an integrated oil and gas company involved in gathering, processing, and transmission of natural gas. Natural gas gathering involves procuring natural gas from producers' wells and transporting it for processing, where natural gas is then separated from natural gas liquids. The processed natural gas is then moved to various centers. The remaining NGL is further divided into individual products like ethane, butane, and propane. This entire journey from processing to fractionation is divided into four key business segments - Transmission and GOM, Northeast G&P, West, and Gas and NGL Marketing. Williams Companies is also involved in marketing services for natural gas and natural gas liquids. The company operates in 14 supply areas and provides marketing services to more than 600 customers.
Strong Financial Performance
Williams Companies continued to deliver a strong performance in Q3 FY22. Adjusted EBITDA grew by 15% from $1,420 million to $1,637 million year-on-year in Q3 FY22. It grew by 12% on a year-to-date basis due to the company's strong performance in its core businesses and upstream joint venture operations in Wamsutter and Haynesville. The company's upstream operations alone contributed $55 million to adjusted EBITDA in Q3 FY22. The quarterly increase in EBITDA was also driven by record-breaking volume growth and favorable commodity prices.
Adjusted net income also increased by 39% on a year-to-year basis in Q3 FY22 and increased by 33% on a year-to-date basis. Available funds from operations stood at $1,241 million and were up by $161 million compared to the same quarter last year. On a year-to-date basis, AFFO grew. This increase was driven by higher operating results. Its capital investment has increased to $526 million from $469 million on a year-on-year basis in Q3 FY22. The company's debt/EBITDA has also improved to 3.68x compared to 4.04x in the last year.
Transmission and GOM segments' EBITDA improved by $41 million year-to-date over the previous year. Revenue for the segment largely came from the Leidy South expansion project.
The company's Northern G&P business' EBITDA increased by $22 million, or by 5%. This was largely driven by higher service revenue from Ohio Valley Midstream. Its volume growth largely came for Bradford and Marcellus south supply basins.
Higher commodity base rates and annual fee escalations led to an increase in G&P rates. On the other hand, although Northeast saw higher EBITDA compared to 2021, its volume growth remained flat. As shown in the graph below, Northeast natural gas production declined by 1.3%, yet Williams' volumes fell only 0.4%, which shows that the company gained market share in the Northeast gas gathering market. The management remains confident in delivering stronger volume growth in the Northeast in 2023.
In the West, adjusted EBITDA grew by 31% on a year-to-date basis in Q3 FY22. On April 29th, the company closed the acquisition of Trace mainstream assets, which contributed significantly towards Q3 EBITDA growth. Segment growth was also driven by higher natural gas and NGL prices. Revenue for this segment increased very little compared to last year.
Williams anticipates 2022 Adjusted EBITDA to be towards the upper half of its previously announced range of $6.1 billion to $6.4 billion. The company also maintains its 2022 growth capital expectation of $1.25 billion to $1.35 billion, excluding approximately $1.5 billion in acquisitions and further expenditures for Trace Midstream and NorTex Midstream assets.
Healthy Dividend Coverage Ratio
Williams' YTD Dividend Coverage Ratio in Q3 2022 has improved to 2.29x compared to 2.03x for the same period last year. An increase in AFFO (Available Funds From Operations) resulted in this improvement. Dividend paid increased from $1,494 million to $1,553 million on a year-to-date basis in Q3 FY22. At the same time, AFFO also increased by 18% from $3,028 million to $3,561 million during the same period.
The stock offers an attractive yield of 5.2% as of this writing. Williams anticipates a debt-to-EBITDA ratio of around 3.6x, which is lower than its earlier guidance of 3.8x.
Recent Growth Projects and Acquisitions
In August 2022, WMB acquired NorTex Midstream for $424 million. This asset is located in north Texas. This investment will help WMB to meet growing demand and allow Williams to serve one of the fastest-growing population centers in the United States. Williams has also signed an MOU with Daroga Power to identify and understand the clean hydrogen market.
Phase 1 of the Springride gathering expansion has been completed. It has added 500 MMcf/d of additional capacity to the pipeline. An extra 100 MMcf/d of capacity will come into force in Q1 FY23.
Solid Projects Pipeline
The company currently has five Transco projects under construction, which are expected to bring 1.2 Bcf per day of capacity online by Q4 FY24 and an additional 600 MMcf/d of capacity in service by Q4 FY25. An additional 30 projects are under development. There are also four new expansion gathering projects in Haynesville underway. This would add 1.2 BCF per day in capacity in total. The company is also increasing its footprint with four Northeast expansion projects under construction. The management expects adjusted EBITDA to more than double by 2025 compared to 2021 driven by its growth projects. Adjusted EBITDA for 2021 stood at $5,635 million.
Louisiana Energy Gateway is expected to commence in late 2024. This project will gather 1.8 billion cubic feet per day of Haynesville natural gas and connect it directly to the premium markets. The company has multiple gas-gathering projects in the Northeast too. It also continues to expand its network in the deepwater Gulf of Mexico. This will add significant volume in FY 2024 and 2025.
Growing Natural Gas Demand
Natural gas demand has remained high and is expected to increase across all sectors. The U.S. natural gas consumption in the first nine months of 2022 increased by 4.3 Bcf/d compared to the same period in 2021.
The power generation sector's demand increased by 7.8% in YTD Q3 2022 compared to YTD Q3 2021. Industrial, residential, and commercial sector demand also increased slightly. Demand for Liquefied Natural Gas and Mexican exports increased by 7.2% in YTD Q3 2022 compared to YTD Q3 2021.
Williams supplies natural gas to a variety of consumers such as residential, commercial, power generators, natural gas distribution firms, and industrial users. Natural gas demand is increasing, and WMB has enough projects in the pipeline to fulfill the increased demand. This should lead to better earnings for the company going forward.
Seeking Alpha's proprietary Quant Rating rate Williams Companies as "hold." The stock is rated high on 'profitability,' but low on 'momentum.'
Our View
Williams is well-positioned to meet the growing need for the supply of natural gas across sectors. The company has allocated $250 million to new energy businesses and has various projects in the pipeline which will create new opportunities in the coming years. Williams has shown solid performance over the years and should continue to do so in the future too, driven by higher demand for U.S. LNG exports. The company continues to see strong demand from domestic markets as well. The commodity price increase, volume growth, and expansion projects should continue the momentum for Williams and also help it meet its projected targets. We believe that Williams is well positioned to create long-term shareholder value and pay higher dividends as the company is in a healthy position for expansion and growth.
For further details see:
The Williams Companies Has Several Long-Term Growth Drivers