Williams Companies – Growth Projects, Improving Margins and Cash Flow Will Drive 20% Dividend Expansion, Backed by Strong Industry Tailwinds
Founded in 1908, the Williams Companies (WMB) is an energy infrastructure company that owns interests in or operates 15,000 miles of gas pipelines, 1,000 miles of natural gas liquids (NGL) transportation pipelines and 10,000 miles of oil and gas gathering pipelines. The company’s gas and midstream operations are held by Williams Partners LP (WPZ), in which Williams has a 64% stake. The company also owns the Williams NGL & PetChem Services segment which extracts, treats and sells propane, propylene and butane, and the Access Midstream Partners segment, which offers gathering and treatment services to companies. Williams is well positioned to benefit from the lack of natural gas transportation infrastructure (pipelines) amidst record high demand in some of the fastest growing markets in the U.S., and this will drive solid cash flows and continued 20% dividend growth.
Activist Interest Has Driven Shares Higher
Since the beginning of January 2014, Williams’ shares are up roughly 4.2%, and traded at $40.49, towards the high end of their 52-week range of $31.25 and $40.89, with a price-to-earnings ratio of 46.81 on diluted earnings per share of $0.87. The company reported trailing twelve months’ revenue of $7.1 billion and net income of $605 million.
Shares climbed 3.3% on news that activist investors Corvex Management LP and Soroban Master Fund LP filed a joint beneficial ownership report with the SEC that showed Corvex owns 13.6 million shares of Williams Companies and an additional 5 million shares in underlying call options. Soroban owns 17.4 million shares of Williams Companies. Including another 24.2 million shares from cash-settled swaps and options, the Corvex and Soroban have a combined aggregate interest of 9.86% in Williams Companies.
Keith Meister of Corvex (who was also a Carl Icahn protégé before he branched out on his own) and Eric Mandelblatt of Soroban plan to join Williams Companies’ Board of Directors, and offer ideas that will help the company improve operations and financial decision making, including possible strategic combinations. Corvex and Soroban recently upped their joint stake in Williams because they like its strong competitive positioning, high demand for natural gas and NGL transportation infrastructure (which was also evident from inadequate supplies through the recent cold spell across America) and tremendous growth opportunities. These activist investors also believe that operational and financial missteps have kept the stock from achieving its full potential. Investors also cheered Williams’ management’s willingness to work with Corvex and Soroban.
20% Dividend Growth, 4% Yield Should Attract Long-Term Investors
Williams Companies has paid a quarterly dividend on its common stock since 1974. The company recently announced a 5.9% sequential increase and an 18.8% annual increase in its dividend for the first quarter of 2014. Shareholders on record at close of business on March 14 will receive $0.4025 per share ($1.61 annualized) for a dividend yield of 4%. The company’s 2013 full-year dividend was $1.44 per share and it plans to increase dividends to $1.75 in 2014 and $2.11 in 2015, with sufficient available cash flow and coverage ratios.
Experienced Executive Team
President and CEO, Alan Armstrong, has been with the Williams Companies since 1986 and held numerous senior positions. He also serves as chairman of the board and CEO for Williams Partners LP. Donald Chappel, serves as CFO; he joined the company in 2003 and has played an integral role in the company’s financial turnaround. Robyn Ewing serves as CAO and came on board in 1998 when Williams acquired MAPCO.
On January 28, the company announced that Frank Billings would be named Senior VP of Corporate Strategic Development, with James Scheel assuming Billings’ former role as Senior VP of Northeastern Gathering and Processing.
Well Diversified Operations
The company operates three natural gas pipelines: Transco, Northwest Pipeline and Gulfstream. These pipelines cover 15,000 miles, have a combined capacity of 14 billion cubic feet per day and deliver roughly 14% of all natural gas consumed in the U.S.
In addition, Williams Companies has partnered with Cabot Oil & Gas (COG), Piedmont Natural Gas (PNY) and WGL Holdings (WGL) on construction of the Constitution Pipeline – a 124 mile planned pipeline from Pennsylvania to New York with capacity to transport 650,000 dekatherms or roughly 5.2 million gallons per day, with construction slated to begin in June 2014.
Williams gathers, processes, stores and transports natural gas, oil and natural gas liquids. Its midstream assets are located in the Western U.S., onshore and offshore in the Gulf region and in the Marcellus shale. These assets have capacity to process 6.6 billion cubic feet of gas per day and produce 200,000 barrels of natural gas liquids per day. In addition, the company has over 10,000 miles of oil and gas gathering pipelines and 1,400 miles of NGL and olefin transportation pipelines.
The company owns a cryogenic liquid extraction plant and an olefins fractionation plant in Canada. The two plants produce 15,000 barrels of high-value natural gas liquids and olefins per day. In addition, these plants annually produce 2 million barrels of propane, 727,000 barrels of butane and 150 million pounds of propylene.
Supporting Macro Trends
Williams is well positioned in key areas of natural gas supply growth, and this should drive transportation revenues and cash flows for the foreseeable future.
Williams should also benefit from strong growth in demand for natural gas by the industrial, power and export segments over the coming decades, and the need for infrastructure to transport NGLs from production facilities to processing, storage and export facilities.
High supply and demand should benefit midstream players such as Williams, with growth in fee-based cash flows.
As the map below shows, Williams has several strategic projects connecting the lucrative Atlantic – Gulf region that are expected to go live over the next two years, and this should drive $3 billion in revenue growth while parallel productivity initiatives should drive margins and move valuation higher.
Strategic Advantages in Oil Sands
Williams is the only company (globally) that extracts and fractionates olefin/NGL mixes from oil sands offgas. Williams has a strong position with excess capacity across its assets, strength in the processing of NGL/olefin mixes from non-oil sands, and scale benefits based on its extensive existing infrastructure. Over the coming decade, Williams could significantly expand potential NGL/olefins volume from existing upgraders and upgrader expansions.
Lucrative Joint Venture Planned
Williams Companies is planning a joint venture with Boardwalk Pipeline Partners (BWP) to develop the Bluegrass Pipeline which would transport natural gas liquids from the Marcellus and Utica shale to the Gulf Coast region.
The pipeline will have the capacity to transport up to 400,000 barrels per day of mixed natural gas liquids. This potential project is predicated on estimates of increased production of natural gas liquids in the Northeast region. In addition to the pipeline, the joint venture includes three other projects: a new NGL pipeline from West Virginia and Ohio to Boardwalk’s pipeline in Kentucky; the conversion of said pipeline from natural gas to natural gas liquids; and the construction of a large-scale fractionation plant in Louisiana.
Solid Industry Trends, Good Competitive Positioning
Williams Companies operates in the midstream segment of the oil and natural gas industry which is still recovering from the economic downturn of 2008. However, in recent years, natural gas demand has increased significantly, especially internationally, and an abundance of propane gas stateside lets U.S. companies offer better pricing and attain high margins, which has led to increased exports and benefited companies such as Williams.
Domestic demand is also expected to get a boost from President Obama’s recently announcement that businesses in the United States will spend $100 billion on new factories that use natural gas.
Williams Companies’ direct competitors include Dynegy Inc. (DYN), Exxon Mobil Corporation (XOM) and Kinder Morgan Inc (KMI). In comparison, Williams ranks third in market capitalization, revenue and net income; and second in margins with gross margin of 40% and operating margin of 21%. William Companies shares have also outperformed the competition in the last quarter.
For the three months ended September 30, 2013, Williams saw a 7.3% decrease in total revenue to $1.62 billion. Operating income decreased by 11% to $336 million. The Williams Partners segment had adjusted operating profit of $388 million, down 12.6% from the third quarter in 2012. The Williams NGL & PetChem Services segment had an adjusted operating loss of $2 million, down 112.5% from the third quarter in 2012. The Access Midstream Partners segment had adjusted operating profit of $6 million. Diluted earnings per share were down 20% from 2012 to $0.20 for the third quarter. The company attributes this large decrease to a drop in NGL and olefin margins. Williams Companies expects earnings per share of $1 to $1.20 in FY 2014, and between $1.35 and $1.65 in FY 2015.
As of September 30, 2013, the company had $732 million in cash and cash equivalents, down $107 million. Total assets increased 8.7% to $26.46 billion due to a 10.6% increase in property, plant and equipment, at cost. Long-term debt decreased to $10.36 billion, down from $10.74 billion, with a debt-to-capitalization ratio of 68.4%.
For the nine months ended September 30, 2013, operating activities provided $1.7 billion, up 32% from the same period in 2012. Financing activities provided $1.09 billion, down 56% from 2012 on lower debt issuance and higher dividends paid. The company used $2.9 billion in investing activities, primarily on higher capital expenditures to fund growth projects. Williams Companies ended the quarter with $732 million in cash and cash equivalents.
Williams is well positioned to benefit from several macro-economic trends and infrastructure expansion initiatives tied to increased demand for oil, natural gas, natural gas liquids and olefins. Government incentives for natural gas use by businesses could support revenue growth. The company should continue to benefit from the lack of adequate natural gas transportation assets, arbitrage opportunities in exports and a shift from coal to clean energy sources such as natural gas. With Corvex and Soroban on the board, shares could spike on restructuring announcements. Irrespective, the company has an attractive 4% dividend yield with dividends slated to increase 20% over the next two years. While shares are near all-time highs, corrections should offer potentially lucrative buying opportunities.