Williams Has an Attractive Collection of Gas Projects Over the Next Decade

Business Strategy & Outlook

Williams Companies has shifted its strategy in recent years to focus on organic growth investments that improve the returns and competitive position of its legacy assets. This is a positive for investors, creating a more stable financial profile and more high-return growth opportunities than most of its midstream peers. Clean energy investments could become a material growth area in the next few years, with the recent Orsted partnership a particularly attractive growth engine for its Northwest portfolio. With nearly half of its earnings and cash flow coming from rate-regulated gas pipelines, Williams increasingly looks more like a utility than an energy company. Williams delivered steady performance through turbulent energy markets the last two years, relying on its largely fee-based, long-term contracted revenue and strategically well-positioned assets. The recent acquisition of Sequent looks well timed, as marketing profits have well exceeded expectations in 2022. Most of Williams’ growth will continue to be directed toward its Transco gas pipeline, which runs from the Gulf Coast to the Northeast. Transco links low-cost gas supply in the Gulf Coast and Marcellus shale to high demand for retail use, LNG exports, gas power generation, and increasing industrial gas demand. Specifically, Williams is developing seven bcf/d of projects related to LNG and five bcf/d for power generation and industrial gas opportunities. The Transco capacity will reach 21 bcf/d by 2023 from 10 bcf/d in 2014 and continue to grow as natural gas demand in the eastern U.S. grows. With more than 100 bcf/d in interconnects and regulatory hurdles for competing projects, Transco faces no major competitive threats. Williams’ other businesses are demonstrating their favorable competitive positions with steady results through volatile energy markets. The Northeast gathering and processing business has a captive customer base in low-cost producing regions. The Northwest pipeline benefits from steady demand from utilities and supply from producers in the Western U.S. Williams is growing and improving the competitive position of its other assets through upstream partnerships.

Financial Strengths

Williams has strengthened its balance sheet and dividend coverage in recent years. Leverage has fallen to 3.9 times at the end of 2021 from over 5 times in 2016, and to continued declines over the next few years. Its improved credit profile and long-term, fixed-fee contract structures gives Williams financial flexibility to pursue growth investment opportunities, grow the dividend, keep the balance sheet strong, and execute its $1.5 billion share repurchase plan initiated in September 2021. The Trace Midstream deal for $933 million has consumed Williams’ excess cash and then some in 2022, but buybacks could exceed $400 million annually in 2023 and 2024. Williams can maintain steady dividend growth even through short-term energy market volatility. Williams has raised its dividend to $1.64 in 2021 from $1.20 in 2017 while strengthening its balance sheet. One can expect 3%-4% dividend increases going forward. The 2018 consolidation of Williams Partners and elimination of incentive distribution rights resulted in a shadow dividend cut of about 17% for former Williams Partners unitholders. The flip side was an improved credit profile, higher dividend coverage, and the ability to invest in growth without issuing equity. The long-running legal dispute between Williams and Energy Transfer over Energy Transfer’s alleged breach of its merger agreement appears to be close to an end. After repeated arguments since 2016, Williams won a $410 million settlement plus fees and interest in December 2021. However, the settlement can still be appealed to the Delaware Supreme Court.

Bulls Say

A large, well-positioned network allows Williams to invest in high-return growth projects with minimal regulatory hurdles.
After several years of structural and financial moves, Williams is positioned to maintain steady dividend growth for the foreseeable future.
Williams is leveraged to U.S. LNG exports via agreements with LNG terminals as a key supplier of gas.

Company Description

Williams is a midstream energy company that owns and operates the large Transco and Northwest pipeline systems and associated natural gas gathering, processing, and storage assets. In August 2018, the firm acquired the remaining 26% ownership of its limited partner, Williams Partners.

(Source: Morningstar)

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