2023-04-09 09:19:41 ET
Summary
- Williams Companies operates in the natural gas environment instead of the crude oil environment, which provides it with much more long-term longevity.
- Natural gas is easy to use to replace coal plants. It's more plug and play than any renewable while dramatically reducing both pollution and costs.
- Williams Companies is continuing to invest in growth opportunities while generating a strong and growing dividend for investors.
- Williams Companies' dividend yield of more than 6% provides strong base cash flow and makes the company a valuable investment along with its other benefits.
Williams Companies ( WMB ) is an American energy company headquartered in Oklahoma, with a more than $35 billion market capitalization and a dividend of more than 6%. The company's impressive asset portfolio of essential natural gas assets will result in massive FCF. We expect the company can turn that FCF to strong shareholder returns making it a strong investment.
Natural Gas Power Growth
The first question for Williams Companies is what is the long-term future of natural gas.
Natural gas not only has enormous growing demand but it has unique benefits in ease of transport, storage, and power delivery. More so large companies are supporting blue and green natural gas as low-footprint sources of natural gas, which will help demand to remain strong for decades to come. In our view, natural gas is only at risk for those looking 50+ years in the future.
More so natural gas has a unique ability in the power infrastructure field. It's almost plug-and-play in existing coal plant areas, and replacing it could cut CO2 power emissions by a massive 34%, equivalent to removing all gasoline cars today. That's even better if EVs are used with natural gas and blue and green natural gas grows.
This is evident, in our view, that natural gas will continue to grow for the long run.
Williams Companies System Strength
Williams Companies has an incredibly strong asset system that delivers natural gas across the United States.
The company's flagship pipeline is the Transco pipeline. It delivers 10s of billions of cubic feet / day of natural gas across the United States. That includes major population centers. The company touches roughly 1/3 of the natural gas in the United States and is in some major areas of growth (such as new LNG terminals).
More so Appalachia is the largest source of natural gas reserves in the United States and particularly grow to population centers. The company's system of assets is well positioned here.
Williams Companies Financial Performance
The company has continued to perform well financially, and it has a history of supporting shareholders.
The company has continued to increase its adjusted EBITDA by 8.5% annually and in line its leverage has continued to drop and its dividend has grown by 6% annualized. The company has a 6% dividend yield with a 2.37x coverage ratio, highlighting its financial strength and double-digit yield. At the same time, the company's debt yield is manageable.
The company's raw EPS number is less important here. However, the important takeaway for investors is that the company is continuing to grow its dividend, something it can comfortably afford, while continuing to invest in its business.
Williams Companies Growth Potential
The company has substantial growth potential that it is continuing to invest in each year.
The company already has a strong core network of assets and as we've discussed the Transco project is at the center of this. As a result, the company is working to incrementally improve its asset base. The basis of that is the ability to add more than 2 Bcf/day of capacity through Transco projects, enough to serve millions of homes.
The assets will improve reliability and the company's ability to generate cash flow. Especially in the north-east the company is working to build out Appalachia shale and we feel that's a market that the company can dominate and use to generate strong returns.
Our View
The company has released its 2023 guidance which could enable growing shareholder returns.
The company forecasts 3% growth on the midpoint in adjusted EBITDA from $6.42 billion to $6.6 billion. Diluted EPS will decrease slightly while AFFO per share will remain roughly constant. However, there's some more important aspects to the breakdown of the company's cash flow and returns that are worth paying close attention to.
The company expects to generate 6% in dividends for the year. At the same time, the company is forecasting a more than 5% dividend growth rate. That's strong direct shareholder returns. The company is also guiding for more than $1.5 billion in growth capex, or a more than 4% growth capex yield, that means double-digit direct shareholder returns.
The company still has substantial debt, but it's continuing to keep its debt manageable. The company expects a 3.65x debt to EBITDA ratio, or $24 billion in debt representing 40% of its enterprise value. It's still spending >$1 billion in annual interest expenditures.
Overall, the company's AFFO / share, represents a 13% yield that the company can comfortably afford and use to drive shareholder returns.
Thesis Risk
The risks to our thesis are fairly minimal. In fact, in our view, the largest risk is that the company needs major revamps or replacements on its Transco pipeline and faces local opposition, similar to what Enbridge has faced with the Line 5 replacement. That could hurt the company's major asset and future returns.
Conclusion
Williams Companies tends to trade at a slightly higher valuation than its peers; however, we still view it as a cheap investment with strong potential. The company operates as a major midstream natural gas company and natural gas has enormous potential. That's both due to its advantages over coal along with the potential benefits of blue and green natural gas.
Batteries, both in capacity and cost, are decades away from being able to compete with the energy density of natural gas. At the time, the technology doesn't exist for the improved density. The company is continuing to achieve growth with incremental additions to Transco and we expect that dividends and shareholder returns will grow.
Overall, as a result of the company's overall portfolio, we view Williams Companies as a valuable long-term investment. Let us know your thoughts in the comments below.
For further details see:
Williams Companies Is A Cheap Essential Company With Strong Return Potential