Williams Companies (WMB) is a substantial natural gas midstream company with a market capitalization near $25 billion. WMB has a near-8% dividend yield, on the back of recent company strength, with the dividend near where it was prior to the COVID-19 collapse. It is one of the few midstream companies to have this recovery.

Why We

(Williams Companies – Yahoo Finance)

Company’s Continued Performance

William Companies has continued to perform well across its business lines. Its particularly strong, energy-dependent, northwest G&P segment has hit record performance.

(Williams Companies 3Q 2020 Performance – Investor Presentation)

Williams Companies saw its adjusted EBITDA drop 1% YoY, showing its strength due to COVID-19 in 3Q 2020. YTD, the company is up 1% YoY with adjusted earnings per year and CFFO up 4% and 3% due to general efficiency improvements. The company’s DCF dropped 6% QoQ or 2% YoY, however, its coverage ratio has remained incredibly strong at 1.59x-1.67x.

The debt-to-adjusted EBITDA has decreased YoY, despite the adjusted EBITDA drop, as Williams Companies has maintained its financial position. At 4.42x, it’s still moderately high, but is still supported by the strength of the company’s financial position. In fact, the most significant cut by the company was its capital expenditures, which dropped 51%.

That was mostly the company positioning itself better due to shareholder fears, although it means it has significantly more capital to redirect to shareholder returns.

Growth

One of Williams Companies’ largest source of strengths is its natural gas focus, where natural gas demand has stayed very resilient.

(Natural Gas Demand – Investor Presentation)

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Across the board, power generation demand has gone up, along with LNG & Mexican exports. Residential, Commercial and Industrial all fell, although it’s worth noting that the Residential and Commercial decline was actually due to a much more significant decline in HDD. On an adjusted basis, demand actually went up

More so, Williams Companies has outpaced the market rate, with its natural gas gathering volumes increasing by 3.1% YoY. That’s on top of U.S.-wide natural gas production declines, highlighting the strength of the company’s business and the importance of its assets.

(Williams Companies Growth Projects – Investor Presentation)

At the same time, Williams Companies has ~$2.2 billion in projects in execution, nearly 10% of its market capitalization, all funded by DCF in addition to its dividend. These projects serve core long-term markets with significant natural gas and electricity. As a result, as they come on-line, they’ll help increase the company’s financial strength.

This includes a number of deepwater pipeline opportunities, to new Gulf of Mexico wells, as the company leverages its expertise to continue expanding its valuable and integrated natural gas system. With nearly 70% of demand for its natural gas coming from utility and power companies, Williams Companies has a reliable customer base that consistently helps it.

Guidance

Williams Companies’ guidance, putting all of this together, highlights its financial strength.

(Williams Companies Financials – Investor Presentation)

Williams Companies expects $3.25 billion in DCF for the year, with dividends at $1.9 billion and roughly $1.1 billion in growth capital expenditures. That leaves the company with several hundred million it can use to push its debt down to a debt-to-adjusted EBITDA midpoint of 4.4x. Given the debt and dividend growth, this is a level the company is clearly comfortable with.

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Going forward, the 5% of market capitalization invested in growth will generate valuable shareholder returns, while the current dividend is more than respectable. The company’s debt is manageable, although we’d like to see it paid down closer to the 4.0x level. However, either way, it is clearly a unique opportunity.

Risk

Williams Companies’ risks are much more long term. The company has virtually minimal competition across its impressive natural gas transmission network, along with its expertise. However, longer term, despite natural gas’ benefits over other forms of power like coal, it faces a long-term steady shift to other forms of power, like renewables.

Given the company’s focus on the cold Midwest, we expect this to be long-term, giving the company ample room to anticipate and maneuver. Still, it’s a risk worth paying attention to.

Conclusion

Williams Companies has an impressive portfolio of assets, and the company has, impressively, continued to invest in its long-term growth potential. The company has mostly recovered from the COVID-19 related sell-off, helping to highlight the financial strength of its business. That means that it’s more expensive to invest in now, but it’s still a valuable opportunity.

For investors who are looking for steady long-term cash flow, growth potential, a continued commitment to shareholder rewards and utility-like financial reliability, Williams Companies is a unique investment opportunity. As a result of these benefits, despite long-term risks of a slow movement away from natural gas, we recommend investing in the company.

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Disclosure: I am/we are long WMB. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.



Via SeekingAlpha.com

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