Q3 2023 Earnings Summary
- Williams is poised to capitalize on significant growth opportunities due to increasing natural gas demand, especially in the Northeast, Mid-Atlantic, and LNG markets. The company anticipates that its project backlog for 2025-2026 will turn into substantial projects, driven by delays in alternative energy sources like offshore wind and increasing energy needs ( , ).
- Strategic acquisitions and operational synergies are enhancing Williams' value proposition. The recent acquisitions in the DJ Basin are expected to provide low-risk, high-value synergies, potentially lowering acquisition multiples by "better than 1 or 2 turns" ( ). Additionally, optimizing operations, such as taking over operatorship of Blue Racer, is reducing inefficiencies and improving performance ( ).
- Williams forecasts strong financial performance and plans to grow dividends in line with EBITDA growth at 5% to 7%, indicating robust shareholder returns. The company expects significant earnings growth from projects coming online in 2024 and 2025, particularly in transmission and Deepwater Gulf of Mexico, with potential upside from accelerating these projects ( , ).
- Uncertainty in Volume Growth Due to Producer Response: WMB's volume growth in its gathering business for 2024 is uncertain and depends on producers' responses to natural gas prices and the forward curve. Management stated that it's "a little bit early right now... to be calling what we'll see from the producer community in '24," which could impact volume growth on the gathering systems.
- Absence of 2023 Hedging Benefits May Affect 2024 Earnings: The company benefited from gathering and processing related hedges in 2023. However, these hedges will not be in place in 2024, potentially leading to lower earnings. John Porter noted that "we will see the absence of some of the gathering and processing related hedges that we had in place in 2023."
- Potential Reduction in Pipeline Volumes Due to Competitor Expansion: The expansion of ONEOK's Elk Creek pipeline may result in reduced Bakken flows on WMB's Overland Pass Pipeline (OPPL). Micheal Dunn acknowledged that "we'd see less Bakken flows" if ONEOK's expansion is completed, which could impact pipeline utilization and revenues. While WMB plans to bring in DJ Basin volumes to mitigate this, it's uncertain if this will fully offset the potential loss.
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Southeast Supply Enhancement Project Timing and MVP Delay
Q: If MVP is delayed, will your project's start date be pushed?
A: Alan Armstrong explained that if the Mountain Valley Pipeline (MVP) doesn't get done between now and 2027, they might need to find another way to supply their markets, which could mean a bigger project. However, their customers have urgent needs, and they plan to proceed with the initial project without waiting for MVP. -
DJ Basin Acquisitions and Synergies
Q: Can the 7x acquisition multiple be reduced with synergies?
A: Chad Zamarin stated that the 7x multiple reflects the stand-alone acquisition value. They expect significant opportunities to integrate the assets, which will increase value over time. As existing commitments roll off over the next 12 months, they can consolidate volumes and move more NGLs through their system, effectively lowering the acquisition multiple with synergies. -
Capital Allocation Amid Higher Interest Rates
Q: How do higher rates impact capital allocation and returns?
A: John Porter mentioned they haven't significantly changed their returns-based capital allocation approach despite higher borrowing costs. They continue to see strong returns on invested capital, and higher interest rates may actually benefit their business by making natural gas-fired generation more attractive due to lower upfront capital costs compared to alternatives. -
EBITDA Growth Expectations for 2024 vs. 2023
Q: How will volumes and margins affect 2024 vs. 2023?
A: Alan Armstrong noted that base business continues to grow, but volume growth depends on producer responses. Several projects will contribute to 2024 growth, including expansions in transmission and Deepwater Gulf of Mexico. However, some gathering and processing hedges present in 2023 won't be in place for 2024. -
Adding Projects to Backlog Due to Gas Demand
Q: Could you increase CapEx to add projects given gas demand growth?
A: Alan Armstrong expects many projects in their pipeline to move forward due to rising demand. He anticipates additional projects will help serve gas demand increases, especially for power generation in the Northeast, Mid-Atlantic, and LNG markets. It's unlikely they won't see more projects added to their backlog. -
Utilities’ Shift in Perspective on Natural Gas
Q: Are utilities adjusting views on gas amid rate pressures?
A: Alan Armstrong observed that in the Southeast and Mid-Atlantic, utilities urgently need natural gas due to demand growth and limitations of alternatives like offshore wind. In the Northeast, shifts haven't occurred yet, but he expects realities to set in as demand continues to grow and alternatives face challenges. -
Benefit from Increased Gas Price Volatility
Q: How will you benefit from expected gas price volatility?
A: Chad Zamarin explained that their core infrastructure converts volatility into infrastructure solutions. They benefit from basis differentials and are well-positioned to capture value from increased volatility through marketing, storage, and optimization, driving value across their business. -
Transco Expansion Challenges Texas to Louisiana
Q: What are impediments to scaling up Transco from Texas to Louisiana?
A: Micheal Dunn stated that FERC approvals for looping projects can take 1.5 to 2 years due to environmental impact statements, making them more time-consuming than compression-only projects. However, looping is less controversial and uses existing corridors, which can aid in approval and minimize landowner resistance. -
Impact on Overland Pass from Elk Creek Expansion
Q: Will Elk Creek expansion affect Overland Pass volumes, and can DJ NGLs backfill?
A: Micheal Dunn noted that if ONEOK expands Elk Creek, they might see fewer Bakken flows on Overland Pass. However, they have space to bring in DJ Basin volumes, so they don't see it as a constraint and can utilize NGLs from DJ assets to backfill any volume loss. -
Dividend Growth Relative to EBITDA Growth
Q: Will dividend growth match the 5% to 7% EBITDA growth?
A: Alan Armstrong stated that while dividend growth is a board decision, they intend to continue growing it in line with their Adjusted Funds From Operations (AFFO), which is growing at 5% to 7%, keeping it within their established growth rate.