WMB - Williams Company

[Spekulatius]

There are not too many income stocks around right now that don’t make you cringe when looking at it, but this is one of them. Williams is a gas pipeline company and most of its assets are  FERV regulated utility like assets (Transco, Northwest pipeline ). In addition to this they own some unregulated and lower quality gathering and processing assets mostly in the Marcellus shale, some of which were acquired from CHK a couple of years ago. For an utility, it looks optically cheap, the dividend yield is ~6.4x, EV/EBITDA is ~10.5 and debt/EBITDA ~4.2x. They ran into some real trouble towards the end of the energy boom in 2015, when ETP dumped them, because with falling equity prices, the acquisition become nonsensical for them. WMB had to restructure, sell assets, fold in their captive MLP (WPZ) and by means of this,  and some organic growth the debt load got to a reasonable level. So now we have a stock that yields ~6.4% and can grow the dividend by about mid single digits for the next couple of years, if plans work out.

 

The business is somewhat dependent on NG volumes (mostly the G&P assets)  but there is no virtual direct energy price exposure, Yet, the stock tends to ebb and surge with the energy and E&P stock prices to some extend. In my opinion, this opens up the shares to opportunistic buys, which is what I have been doing lately. I believe the valuation is favorable - distributable cash flow (a similar measure to AFFO for Reits) is about $2.5/ share, and should go up next year due to already completed projects, so this is an ~10% “owner earnings yield”.

 

FWIW, WMB Main asset, the Transco pipeline is by many analysts considered the best pipeline asset in NA, due to its connectivity and growth prospects. That’s were WMB expansion projects are smirky focused right now. As long as WMB’s management doesn’t do anything dump (admittedly and if, because they do tend to get the company into trouble every 10 years or so), the stock should return low double digits, with more than half of it coming from the dividend along.

https://investor.williams.com/sites/williams.investorhq.businesswire.com/files/event/additional/2019_European_Investor_Meetings-_FINAL.pdf

 

WMB my favorite pipeline co right now. I have  invested in pipelines for 10 years and bought some WMB (and more WPZ shares) in early 2016 with pretty good returns. I do buy and sell these opportunistically, but right now I am buyer because I think the valuation and outlook is pretty favorable.

 

<< corrected for spelling>>

[awindenberger]

If you like WMB what about ET? Their dividend yield is over 9% and their DCF/Div is around 200%.

[Spekulatius]

If you like WMB what about ET? Their dividend yield is over 9% and their DCF/Div is around 200%.

 

I like ET’s assets, but hate their management. Kelcy Warren is a terrible at capital allocation (see the latest Semgroup acquisition, which makes no sense whatsoever), but moreover, the shares he issued to himself at the very bottom in 2016 (extra class with a preferred distribution priority) is one of the most egregious examples of CEO theft I have seen.

 

Also, ET is still an MLP, while WMB is a c-Corp. I prefer the latter, it is much more advantageous for opportunistic buying and selling and there are no issues in IRA’s.

[lnofeisone]

Spek - I like both WMB and ET. I agree with your assessment of WMB and have sold puts over time. The latest batch will most likely be assigned to me. I disagree with you on ET wrt acquisition of SEMG (agree on KW isn't being the best at times). ET was going after Houston Fuel Terminal (and Houston is a big deal with import/export) and I wouldn't be surprised if they sell off the remaining assets. Take a look at what EPD paid for assets in Houston just few years back and the vast sums they are investing into Houston. Back to WMB  8).

[Spekulatius]

Spek - I like both WMB and ET. I agree with your assessment of WMB and have sold puts over time. The latest batch will most likely be assigned to me. I disagree with you on ET wrt acquisition of SEMG (agree on KW isn't being the best at times). ET was going after Houston Fuel Terminal (and Houston is a big deal with import/export) and I wouldn't be surprised if they sell off the remaining assets. Take a look at what EPD paid for assets in Houston just few years back and the vast sums they are investing into Houston. Back to WMB  8).

 

Just because EPD overpaid for assets years ago doesn‘t mean that overpaying now is good idea. They pay 12x EBITDA for a mixed bag of assets, while their own stock trades for 8x EBITDA. no wonder the market gave them another haircut .I owned ETP once until I realized that the game was about empire building not total return. And while I owned it at that time (and never since), the screw job that KW did to its “partners” in 2016 when credit and equity markets closed for a short time is without equal even in MLP land. Well in my opinion, this deserves to trade at a discount to peers.

[Mephistopheles]

Spek, thanks for sharing this idea. I took a look over the past few days and what I gather is:

 

1- Natural gas demand is certain to increase over the next few decades as coal use heads towards zero

2- Transmission pipelines are not being built anymore, in fact since 2002 their mileage in U.S. & Canada has remained steady at around 300k

3- The existing pipelines are becoming more efficient and adding more capacity to soak up increasing demand

4- A majority of the capex is growth to increase capacity, which is up 33% over the last 4 years, from 16 Bcf/d to 22 Bcf/d

5- Once they stop spending on growth it becomes a cash cow

 

Therefore, it's a great ROIC with high operating leverage and a long runway of increasing demand selling for a reasonable price

 

Is that a good outline of your thoughts on this one?

[Dalal.Holdings]

This thing looks like one of the safest midstream plays to me and I recently got in. Transco in particular is integral to heating many many homes in the east. Growth opportunities exist in conversion of coal to nat gas power in Appalachia. Another energy play where you just have to hope management avoids doing anything stupid.

[Spekulatius]

Spek, thanks for sharing this idea. I took a look over the past few days and what I gather is:

 

1- Natural gas demand is certain to increase over the next few decades as coal use heads towards zero

2- Transmission pipelines are not being built anymore, in fact since 2002 their mileage in U.S. & Canada has remained steady at around 300k

3- The existing pipelines are becoming more efficient and adding more capacity to soak up increasing demand

4- A majority of the capex is growth to increase capacity, which is up 33% over the last 4 years, from 16 Bcf/d to 22 Bcf/d

5- Once they stop spending on growth it becomes a cash cow

 

Therefore, it's a great ROIC with high operating leverage and a long runway of increasing demand selling for a reasonable price

 

Is that a good outline of your thoughts on this one?

 

I think it is.

One risk to look at is that they own gathering assets in Wyoming and Appalachia. both are low cost NG Bassins, but CHK went bankrupt and we still have to see if they need to take a haircut on cash flows (via contract renegotiations) to keep the gas flowing. I have exited this on the way down around current prices and haven’t entered back in, so I haven’t kept track of this.

 

Alternative plays with both pros and cons are EPD and OKE.

[Dalal.Holdings]

Relevant:

 

https://www.spglobal.com/marketintelligence/en/news-insights/trending/iEJBUapEkb7YEr4bx_yofw2

[Dalal.Holdings]

Adding here...

[Dalal.Holdings]

Earnings out for Q3. Qtr and YTD look not too shabby considering the year it's been.

 

The transmission (pipeline) part of the business is expected to be stable steady growth biz (tollbooth), but what's interesting due to potential higher returns on incremental capital is the G&P part of the business (once they have established G&P presence in shale plays, the returns on further expansions are very high). In the most recent qtr, Northeast G&P (Marcellus, Utica based) hit records: Nat Gas Gathering Vol up 8.4% YoY, Nat Gas processing Plant Vol up 17%, NGL production volumes up 24%...

 

Meanwhile there is potential that shut-in of oil producing fracking plays that make gas as a (money-losing) byproduct (mostly down south and not in Marcellus/Utica or Haynesville) could leave a setup for a drop in national Nat Gas supplies ahead of winter. The spot price of Nat gas is already higher than it ever hit in 2019 as of writing...

 

Yeah, there's been an overall glut in Nat Gas for over a decade now and prices crushed as a result, but there is a rising probability that low oil prices leading to drop in rig count/shut-ins in plays that make oil + gas like Eagle Ford lead to a drop in overall nat gas supplies which leads to a bump in U.S. prices...

 

There was a question on Chesapeake and bankruptcy and management presents a pretty compelling case on why they may be pretty well insulated:

https://investor.williams.com/events-and-presentations/event-details/2020/Barclays-Virtual-CEO-Energy-Power-Conference/default.aspx

Transcript: https://seekingalpha.com/article/4373336-williams-companies-inc-wmb-ceo-alan-armstrong-presents-barclays-ceo-energy-power-2020?part=single

 

Namely, a lot of contracts were rewritten to protect midstream interests in bankruptcy after some court decisions a few yrs back that hurt midstream companies, Northeast area negotiated rates for WMB with gas producers are already low and unlikely to be revised in bankruptcy, and the CHK bankruptcy judge (Jones) has been outspoken against the Sabine decision where midstream got hosed...

 

Management also seems excited for a leaner CHK to emerge that will now actually be able to grow gas production as opposed to being hampered by enormous debt obligations.

 

Overall, Armstrong seems to understand his business, importance of returns on capital and seems focused on the long term.

 

[Spekulatius]

Crude fracking going down the tubes is bullish for WMB. The NG as a side product from crude production was depression prices and less crude production means less NG as a byproduct which is good for Marcellus and good for WMB.

 

I don’t own it right now, but as a dividend play, it may be hard to beat.

[Dalal.Holdings]

Yeah, it's almost like this thing is trading with crude prices (irrelevant) and totally ignoring NG pricing...I'm not complaining.

 

If I had the choice between XOM with ~150 bp higher payout subject to the whims of crude pricing or this, it's a slam dunk...

 

The other midstream plays have a lot more exposure to oil based production basins too.

 

This is as pure NG midstream as you can get. And current spot NG prices are higher than they ever were in 2019...in the middle of a pandemic...

[Dalal.Holdings]

Really amusing that this trades with the energy sector as a whole.

 

With the pandemic, we have an unusual situation:

 

The pandemic reduces crude oil demand and boosts crude oil supply significantly, but as far as Natural Gas:

 

1) Demand: Natural gas demand stays steady or may even rise--now you'll heat your home, consume more electricity 24/7 if you're stuck there.

 

2) Supply: As oil prices sink, frackers in many U.S. basins who profit off of crude (when crude prices are high) but produce NG at a loss are forced to cut down on drilling and shut in existing wells. Nat gas supplies will fall mostly due to the oil-NG producing basins (as opposed to the pure NG basins where WMB has significant G&P assets)...

 

Then you have the whole shift from coal/nuclear to NG in the U.S. happening as well...

 

It may be understandable to have midstream companies with more exposure to crude producing basins like the permian or Eagle Ford sell off with oil, but WMB is probably the most pure American NG midstream play there is working out of Marcellus, Utica, Hayneville (sure, there is some exposure to Eagle Ford).

 

This may be accounted for to some extent (the divi is not as high as other midstream plays), but then you also have to account for its unrivaled assets with a wide moat (Transco, etc).

 

And anyone concerned about negative political implications is fooling themselves. We've just seen the importance that the state of PA will play for both parties for elections to come...no one will want to give that up.

 

I think the risk-reward is much more favorable for WMB compared to just about anything else in oil & gas.

[JRM]

I agree and my ego appreciates the confirmation.  I posted the following in the general section a while back, relevant to WMB and other NG pipeliners:

 

The Williams Company CEO was recently asked about renewables displacing natural gas for electricity generation.  Here is the first part of his response:

 

"Yes. I think it's really important that we actually look at the facts as opposed to kind of the messaging that goes on within the space these days because it's obviously very popular to talk about renewables addition, and it's not as popular to talk about natural gas. And so -- but if you really look at the details, in fact, EIA just put out a report on August 25th that shows the amount of gas generation capacity additions, actually shows all of the generation capacity additions that have been filed for and in long-range plan process. And if you look at that closely, you'll see that Virginia and North Carolina together over 50% of the capacity that's being added is from natural gas...If you take it and look at it on a utilization basis, in other words, how much of the capacity is capable of being generated by those facilities and expected via a planned utilization, it's 77% of the planned additions in Virginia and North Carolina. So almost 80% of the new capacity is on natural gas"

https://seekingalpha.com/article/4373336-williams-companies-inc-wmb-ceo-alan-armstrong-presents-barclays-ceo-energy-power-2020?part=single

 

I've been looking for this EIA report, and haven't found it yet.  But it looks like the EIA expects renewables to displace coal and nuclear generation.  Natural gas is projected to continue to grow and retain market share.  Their projections are sensitive to gas prices.

 

Richard Kinder has been providing similar messaging during Kinder Morgan's quarterly conference calls, but apparently nobody is listening or cares.

 

To me, natural gas pipelines are the most obvious value in plain sight.  The easements and right of ways become more valuable overtime as it is becoming nearly impossible to build new pipelines in the face of green-washing backlash.

[LearningMachine]

Are folks not concerned about WMB's share printing over the years?  Looks like sign of a management that will continue to print in the future too.

[JRM]

Are folks not concerned about WMB's share printing over the years?  Looks like sign of a management that will continue to print in the future too.

 

It looks like the share count has been stable since converting to a c-corp in 2018.  One of the advantages of converting to a c-corp is getting off the MLP growth model of issuing shares and debt to fund growth.  Anything is possible, but WMB and KMI so far have been sticking to a similar playbook to get off the MLP model.

[Spekulatius]

Are folks not concerned about WMB's share printing over the years?  Looks like sign of a management that will continue to print in the future too.

 

It looks like the share count has been stable since converting to a c-corp in 2018.  One of the advantages of converting to a c-corp is getting off the MLP growth model of issuing shares and debt to fund growth.  Anything is possible, but WMB and KMI so far have been sticking to a similar playbook to get off the MLP model.

 

There was a significant increase in share count when they folded back their captive MLP WPZ into WMB in an exchange of units for shares. But that’s just an asset swap and not really dilution, imo.

 

Besides that, there is just a very slow creep in sharecount due to options/ equity for management.

[lnofeisone]

I've been looking for this EIA report, and haven't found it yet.  But it looks like the EIA expects renewables to displace coal and nuclear generation.  Natural gas is projected to continue to grow and retain market share.  Their projections are sensitive to gas prices.

 

I think the reason you weren't able to find this report is because Willaim's CEO conflated a few reports. You'll find this info if you look on a state by state basis (e.g., https://www.eia.gov/state/print.php?sid=VA).

 

Having said that, it looks like WMB and KMI found their discipline a few years back (these constitute fairly large chunks of my portfolio) and are finally earning their keep and paying down debt. They don't have to do much outside of keeping the pipelines running and doing small projects here and there. ET (smaller holding of mine, mostly due to to rapid share decine) is lagging behind but finally getting on the same page financially. ET also has few projects that will come online in 2021.

 

As far as renewables go, one thing to keep in mind that most renewables participate exclusively in electric markets. That doesn't represent the total market (though ESG crowd usually ignores this aspect). In the US, non-electric transportation (for now) and heating (also for now) consume probably just as much energy as electric markets and most of those are very much oil/natural gas. This is a long way of saying that renewables will displace coal (too dirty) and nuclear (too expensive and too long to build but immensely profitable to operate) first and natural gas is going to be here for a while.

 

My strategy here is having WMB/KMI/ET and slowly (over the next 5-10 years) scaling out and moving into ICLN/DNNGY (long small lots on both) or the like.

 

 

[LearningMachine]

Are folks not concerned about WMB's share printing over the years?  Looks like sign of a management that will continue to print in the future too.

 

It looks like the share count has been stable since converting to a c-corp in 2018.  One of the advantages of converting to a c-corp is getting off the MLP growth model of issuing shares and debt to fund growth.  Anything is possible, but WMB and KMI so far have been sticking to a similar playbook to get off the MLP model.

 

There was a significant increase in share count when they folded back their captive MLP WPZ into WMB in an exchange of units for shares. But that’s just an asset swap and not really dilution, imo.

 

Besides that, there is just a very slow creep in sharecount due to options/ equity for management.

 

Maybe I could have accepted if the dilution was only on the WPZ (MLP) side, but they have also been diluting on the WMB side, almost every year, under the same CEO.  During all of these dilutions, WMB was a C-Corp (The Williams Companies, Inc.).  They always seem to give an explanation for printing shares, but I'd rather pay attention to what they DO as anything can be given some kind of an explaination. 

• In 2018, they printed 383,653,927 WMB shares to complete merger with WPZ (MLP). You mentioned this one.
  
• In 2017, they printed 75,758,253 WMB shares. Reasoning given was to purchase newly issued common units in WPZ as part of our Financial Repositioning.
  
• In 2015, they printed 63,479,002 WMB shares. Reasoning provided was to fund a portion of the ACMP acquisition.
  
• In 2013, they printed 89,351,094 WMB shares. Reasoning provided was to purchase additional WPZ shares in connection with WPZ's Caiman acquisition and to fund a portion of our access in Access Midstream Partners.
  

 

Of course, they have been printing every year beyond that for management also, albeit smaller amounts.

 

I predict with 90 percent probability that they will print again in the future and will give you some sort of reasoning.

 

Just look at their recent quarterly earnings call (Nov 3, 2020) on how they are thinking their stock price is not too low at these prices when asked whether they will be willing to change their mind and do significant buybacks:

 

"I don't think there's anything that I can foresee right now anyway that would waiver. Obviously, if we saw a stock price collapse or something like that, that might change that mind and be opportunistic." 

- Alan Armstrong, CEO, Williams Companies, Inc. on Nov 3, 2020 9:30 am ET Earnings Call after stock had hit $18.63 the day before.

 

[Dalal.Holdings]

Share count has been pretty steady since Q4 2018 filing:

 

Q3 2020 10-Q (as of Oct 29, 2020): 1213.5 M Shares Outstanding

 

2018 10-K (as of Feb 15, 2019): 1211.0 M Shares OS

 

That's a whopping 0.2% dilution over > 1.5 years. Of course, there's always a risk of a dumb acquisition that can add a chunk of shares.

 

With most energy plays, there is always a risk of management doing dumb things. I don't have a strong view on this management, but recent calls have given me some assurance that they understand the value of their assets and importance of returns on capital employed. However I agree they may not understand the utility of buybacks--but then again they are paying out much of their DCF and don't have a whole lot of FCF right now to do buybacks due to their growth capex anyway. Any remaining FCF is prioritized to bring down leverage right now which I would agree with first and foremost.

 

Generally cyclical companies (energy companies especially) do increasingly stupid things during good times. During the lean times, not so much. And we are in lean times.

 

Even so, the right acquisition in this space could be done at a decent prices given the sector's underperformance. I mean, Berkshire going in on Dominion's midstream NG assets tells you a bit about Buffett's view on the sector's valuation.

[Dalal.Holdings]

*when I say FCF, I mean FCF left over after distributions.

[LearningMachine]

Share count has been pretty steady since Q4 2018 filing:

 

Q3 2020 10-Q (as of Oct 29, 2020): 1213.5 M Shares Outstanding

 

2018 10-K (as of Feb 15, 2019): 1211.0 M Shares OS

 

That's a whopping 0.2% dilution over > 1.5 years. Of course, there's always a risk of a dumb acquisition that can add a chunk of shares.

 

With most energy plays, there is always a risk of management doing dumb things. I don't have a strong view on this management, but recent calls have given me some assurance that they understand the value of their assets and importance of returns on capital employed. However I agree they may not understand the utility of buybacks--but then again they are paying out much of their DCF and don't have a whole lot of FCF right now to do buybacks due to their growth capex anyway. Any remaining FCF is prioritized to bring down leverage right now which I would agree with first and foremost.

 

Generally cyclical companies (energy companies especially) do increasingly stupid things during good times. During the lean times, not so much. And we are in lean times.

 

Even so, the right acquisition in this space could be done at a decent prices given the sector's underperformance. I mean, Berkshire going in on Dominion's midstream NG assets tells you a bit about Buffett's view on the sector's valuation.

 

Buffett is not printing BRK shares to buy Dominion's midsteam NG assets.  However, this company has been printing shares for multiple years. 

 

Is there a reason you are ignoring the pattern of share printing from before 2018 even though they were a c-corp then also?

[Dalal.Holdings]

The Berkshire reference was only to indicate where valuations in the sector are in the eyes of a value investor (Buffett). So even if management went and bought something, it would be unlikely to be overpriced in the current market.

 

See the first post in this thread. This firm was struggling mid decade during the energy collapse. Share issuance and folding in WPZ became imperative due to the company's struggles. I view the current downturn in energy as unique when it comes to NG/WMB. That being said, as with most energy companies, I acknowledge there is a nonzero risk of management buying something dumb (using stock), but management is already planning on cutting growth capex over the next year or two, so an acquisition would seem out of step with that.

 

My thesis here revolves around the notion that I do not view the current energy bust as negative for WMB due to its current leverage ratio, revised contracts with producers after Sabine, wide moat assets (Transco, Gulfstream), exposure predominantly to NG (as opposed to oil based) basins, and firming up of NG prices due to improving supply/demand in the U.S. and unique implications of the pandemic on energy consumption/production...

[Dalal.Holdings]

I've been looking for this EIA report, and haven't found it yet.  But it looks like the EIA expects renewables to displace coal and nuclear generation.  Natural gas is projected to continue to grow and retain market share.  Their projections are sensitive to gas prices.

 

I'm trying to imagine renewables displacing NG in large scale and I don't see it happening easily. Especially not in the Northeast where sunlight is poor in the winter and there are plenty of overcast days year round. NG is pretty clean as it is compared to coal.

 

Furthermore, you still have a whole bunch of homes plugged into natural gas for heating/cooking in one of the most populated regions of the country that gets very cold winters (Northeast). Are we going to start replacing all this infrastructure with an alternative heating/cooking solution? With what exactly?