2023-05-10 09:30:42 ET
Summary
- Williams Companies is a high-quality midstream play with robust upside potential and a well-protected dividend.
- The company has strong fundamentals and a disciplined capital allocation strategy that have enabled it to generate impressive growth.
- The stock could provide investors with potentially strong total returns at its current discounted price.
Learning to embrace market volatility can set one on a path to financial freedom. In fact, Warren Buffett recently said that "what gives you opportunities is other people doing dumb things" at his recent Berkshire Hathaway ( BRK.A )( BRK.B ) annual shareholders meeting.
This brings me to Williams Companies ( WMB ) which I last covered here back in March, highlighting the strength of the enterprise. As shown below, WMB is now again sitting near its 52-week low with shares trading under $30. In this article, I cover the recent earnings results and discuss why now may be a great time for income and value investors to pick up this stock.
Why WMB?
Williams Companies is a leading midstream player that offers transport, storage, and delivery across the natural gas value chain. It owns and operates over 33,000 miles of pipelines system wide, including Transco, which is America's largest volume and fastest growing pipeline. It handles about a third of all natural gas consumed in the U.S. for power generation, industrial, and heating uses.
Unlike other midstream gas players such as Enterprise Products Partners ( EPD ), Energy Transfer ( ET ), and MPLX LP ( MPLX ), Williams Companies is structured as a C-Corp, which means no Schedule K-1s during tax season.
WMB enjoys utility-like business model, as nearly half of its earnings come from rate-regulated pipelines. In recent years, WMB has focused on organic improvements to improve the returns on its existing portfolio. This includes expanded gas marketing with the recent Sequent deal, and added storage and transmission assets with its MountainWest and Nortex deals.
WMB recently demonstrated strong first-quarter results , with adjusted EBITDA up by 19% YoY to $284 million, and cash flow from operations grew by a robust 40% YoY to $1.5 billion. This was driven by strong margins and volumes in Gas & NGL (as shown below), with record gathering volumes and record contracted transmission capacity, which were up by 18% and 33%, respectively.
Looking ahead, WMB continues to strengthen its portfolio, as it recently accelerated the timing on key deliverables for fixed fee projects. This includes WMB's Louisiana Energy Gateway Project and Transco's Southeast Energy Connector and Regional Energy Access projects.
Moreover, WMB recently executed a key agreement with integrated energy giant Chevron ( CVX ). This project is expected to connect prolific shale basins to expanding LNG export markets. Importantly, WMB has fully integrated the Sequent assets and that's starting to bear fruit, as noted during the recent earnings call :
In the Northeast, we benefited from record gathering volumes and significantly outperformed the broader Marcellus production trends as Sequent provided takeaway markets uniquely for our producing customers in Ohio. In the transmission and Gulf of Mexico segment, we realized higher short-term firm sales on our pipes as Sequent helped to commercialize more business in that area as well and now back to the big variance in our processing margins.
In the West, our NGL processing margins on the legacy Williams business were actually negative due to abnormally high natural gas prices at Opal and really throughout everything west of Opal. Normally, this would have shown up as a significant negative issue for the quarter. However, Sequent was able to capitalize on these large natural gas basis spreads in the West and more than offset the negative NGL margins turning this volatility into a net positive for Williams.
Meanwhile, WMB carries a strong BBB rated balance sheet with a net debt to EBITDA ratio of 3.6x, sitting below the 3.8x from the prior year period, and below the 4.5x level generally considered safe for midstream companies by the ratings agencies.
WMB also has internal sources of funding through retained capital, as it carries an AFFO dividend coverage ratio of 2.65x , sitting higher than the 2.3x from the first quarter of last year. At present, WMB yields an attractive 6.1%, and the dividend comes with a 6.8% 5-year CAGR and 5 years of consecutive growth.
Turning to valuation, I find WMB to be highly attractive at the current price of $29.45 with a price to cash flow of just 6.7x. As shown below, this sits at the low end of WMB's 5-year trading range outside of the early 2020 timeframe. Plus, sell side analysts who follow the company have a consensus Buy rating with an average price target of $36.46 , implying a potential 30% total return over the next 12 months.
Investor Takeaway
All in all, I find Williams Companies to be a highly attractive midstream play with robust upside potential and a high and well-protected dividend. The company has strong fundamentals and a disciplined capital allocation strategy that have enabled it to generate impressive growth. This includes the most recent quarter, with record setting performance.
Moreover, its balance sheet is solid and retained cash flow after the dividend provides ample room to fund organic projects. As such, income and value investors may want to consider layering into WMB at its current discounted share price.
For further details see:
Williams Companies: Too Good To Pass Up At 6.7x Price To Cash Flow