WMB - Williams Company

[LearningMachine]

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?

 

My guess is natural gas used for heating/cooking doesn't compare to the amount of natural gas used for power generation. Over time, you could replace it with electricity from wind/solar+battery storage+transmission.

 

Here is a letter that tech companies that are starting to use battery storage for data centers sent to Dominion that contributed it to it selling off its natural gas infrastructure: https://www.ceres.org/sites/default/files/VA%20Data%20Center%20IRP%20Letter%E2%80%93Spring%202019%20Final.pdf

 

Quote in the letter from AWS, Microsoft, Apple, etc.:

"“Solar plus storage” projects are beating out the price of new gas plants, and data centers are already proving the effectiveness of storage in our 24/7 operations."

[Dalal.Holdings]

Why guess:

https://www.eia.gov/energyexplained/natural-gas/use-of-natural-gas.php

 

Obviously the residential component would be expected to increase in the winter months. Power consumption in many places goes the opposite way--large in the summer (Air conditioner use), less in the winter.

 

Dominion's ACP pipeline was not cancelled due to some letter from Tech companies with a pipe dream about solar power taking over...it was due to legal issues and costs associated with building a new pipeline. There are now lots and lots of barriers to competition for existing pipeline operators due to such a climate that creates lots of opposition to new pipeline construction in the United States. Ever hear of Keystone XL? DAPL?

 

https://www.wsj.com/articles/companies-cancel-atlantic-coast-pipeline-after-years-of-delays-11593975601

 

It was the fact that ACP was cancelled that triggered Dominion to sell to BRK.

 

ACP would have competed with WMB's existing presence in WV/VA/NC/etc . The fact that it won't go through is massively positive for WMB and corroborates the fact that existing pipe (esp Transco) commands a large moat.

[lnofeisone]

My guess is natural gas used for heating/cooking doesn't compare to the amount of natural gas used for power generation. Over time, you could replace it with electricity from wind/solar+battery storage+transmission.

 

About 40% of nat gas is used for power generation. 60% is used for heating/cooking/feedstock with heating taking a disproportionate share. Even if you could get enough wind/solar + battery storage to replace the remaining 60% (less feedstock), delivering that much electricity will require some major infrastructure upgrades. Would love to read your thoughts though.

[Dalal.Holdings]

In many ways, existing pipeline operators command similar moat to large railroad operators...these days it is very onerous/expensive (or downright impossible) to build a large scale pipeline like a large scale railroad.

 

Along these lines, I imagine BRK analyzed purchase of Dominion's assets in a similar vein to BNSF.

 

Tollbooth operators with a wide moat.

[Spekulatius]

I think NG will be around for a long time (decades).

 

My thoughts on WMB is that they have good assets (Transco), but also a history of bad capital allocation. They kind of tend to go broke about incense decade (2001, 2009, 2015 etc) and some more recents buys (CHK gathering assets in the Marcellus) haven’t really helped either.

 

WPZ was a Great vehicle for a while, but MLP went out of favor somewhat after the financial crisis and then again after the crude crash and the cost of capital kept going up to the point that WMB first had to support it (musing units and paying for this in shares and then taking it out altogether. One can hope that they learned their lesson, but I am never quite sure and I don’t think that WMB‘s Management is really that great, but if they have little to invest in, there should be much less appetite to do something stupid.

 

If you are too concerned about this, just buy KMI where management has made mistakes too, but more skin in the game.

 

I kind of left this sector, but keep watching ad stocks are very volatile and there tend to buy great opportunities every couple years. Perhaps current prices are such an opportunity, but who knows.

[LearningMachine]

Dominion's ACP pipeline was not cancelled due to some letter from Tech companies with a pipe dream about solar power taking over...it was due to legal issues and costs associated with building a new pipeline.

 

When I said the tech letter contributed, I meant it influenced somewhat because I didn't know more.  Looks like you inferred that to mean tech letter caused, which was not what I said or meant.  My overall intent was to share the letter with folks for an alternative point of view from the big tech companies.

[Dalal.Holdings]

Tech companies have a lot of political pressure to come out in favor of renewables—from their own employees, customers, and others. I don’t see any substance to the letter you posted. This is one facet of the ESG movement and why a lot of these energy plays are in the dumps...

 

I would call such irrationality an opportunity for a contrarian value investor...

 

What renewables do you think will be able to realistically take over energy use in the state of Virginia? In what timeframe?

[LearningMachine]

Tech companies have a lot of political pressure to come out in favor of renewables—from their own employees, customers, and others. I don’t see any substance to the letter you posted. This is one facet of the ESG movement and why a lot of these energy plays are in the dumps...

 

I would call such irrationality an opportunity for a contrarian value investor...

 

What renewables do you think will be able to realistically take over energy use in the state of Virginia? In what timeframe?

 

I actually agree with you that natural gas pipelines themselves can be a good investment and there can be opportunities for a contrarian value investor.

 

It doesn't prevent me from looking at alternative points of view, and I don't discount them outright by calling them irrational or having no substance.

 

It also doesn't prevent me from poking holes in the ownership medium for those pipelines, i.e. the company that holds them.

[Dalal.Holdings]

I enjoy hole poking as well...succumbing to confirmation bias is an investor’s worst enemy. Thank you for contributing to the poking.

[rkbabang]

Yes, it's good to look at the otherside.  But natural gas is probably the cleanest of the fossil fuels, every time a gas plant is built instead of a coal plant that is a step in the right direction.  Also, in Virginia (as well as everything north of Virginia) solar isn't as cheap a power source as it is in the south.    In an ideal world all energy would come from solar and nuclear, but we don't live in that world and gas will be with us for a long long time.

 

[Dalal.Holdings]

I’d guess that mass electric vehicle adoption occurs much sooner than mass utility transition to renewables. So effectively a lot of batteries will go to the automotive sector, not the power sector.

 

In this scenario, you’d have a bunch of EVs effectively being powered by natural gas plants (which would be much more efficient and less CO2 emission than ICE cars) in much of the country...crude would take a big hit in such a scenario, but NG could thrive...

[gokou3]

Enbridge in their Q3 presentation provides their view (and quoting EIA) of the energy future to 2040.  They see global oil consumption mildly INcreasing, and NG consumption even more so.  Still a long runway for oil and gas.  And look at the investment requirement to get the world partially powered by renewables - $35T over 20 years!

 

I think it could both be correct that solar+storage is the cheapest for data center while NG is the cheapest for home heating.  For data center, you have a large point demand equivalent to thousands of homes, whereas for home heating, you would need to have massive last mile infrastructure to those homes which may tilt NG in favor.

[rkbabang]

Enbridge in their Q3 presentation provides their view (and quoting EIA) of the energy future to 2040.  They see global oil consumption mildly INcreasing, and NG consumption even more so.  Still a long runway for oil and gas.  And look at the investment requirement to get the world partially powered by renewables - $35T over 20 years!

 

I think it could both be correct that solar+storage is the cheapest for data center while NG is the cheapest for home heating.  For data center, you have a large point demand equivalent to thousands of homes, whereas for home heating, you would need to have massive last mile infrastructure to those homes which may tilt NG in favor.

 

Not to mention a lot of homes already heat with natural gas.  It will be many decades before everyone switches their heating systems to something else.  Most homes around me (including mine) still heat with fuel oil. 

[Gregmal]

Even in the northeast, you still have both older and new homes being encouraged to come online with nat gas. Its been an active buildout for at least the past decade maybe longer. Solar provides a little bit of a get around as an ambitious homeowner can take the initiative, but anything relying on infrastructure will take forever to transition to, or transition from. I still have heating oil and my neighborhood is "targeting" nat gas options and hoping it happens in the next few years. And yes, all of this shit is expensive. HVAC units cost $10k-$30k typically and last 15-20 years. So once every two decade people may have new options to choose from, and a lot of that still relies on whats regionally or locally in place.

[Spekulatius]

Enbridge in their Q3 presentation provides their view (and quoting EIA) of the energy future to 2040.  They see global oil consumption mildly INcreasing, and NG consumption even more so.  Still a long runway for oil and gas.  And look at the investment requirement to get the world partially powered by renewables - $35T over 20 years!

 

I think it could both be correct that solar+storage is the cheapest for data center while NG is the cheapest for home heating.  For data center, you have a large point demand equivalent to thousands of homes, whereas for home heating, you would need to have massive last mile infrastructure to those homes which may tilt NG in favor.

 

Heating with NG is highly efficient (90% efficiency) and way better and cleaner than oil furnaces. it is mind boggling that we have one of the largest NG fields of the world in our back door (Marcellus) and still have houses heated with dirty oil because we can’t get the pipes to the houses or per it’s for large pipes approved.

 

Not to mention a lot of homes already heat with natural gas.  It will be many decades before everyone switches their heating systems to something else.  Most homes around me (including mine) still heat with fuel oil.

[Castanza]

Even in the northeast, you still have both older and new homes being encouraged to come online with nat gas. Its been an active buildout for at least the past decade maybe longer. Solar provides a little bit of a get around as an ambitious homeowner can take the initiative, but anything relying on infrastructure will take forever to transition to, or transition from. I still have heating oil and my neighborhood is "targeting" nat gas options and hoping it happens in the next few years. And yes, all of this shit is expensive. HVAC units cost $10k-$30k typically and last 15-20 years. So once every two decade people may have new options to choose from, and a lot of that still relies on whats regionally or locally in place.

 

Just had gas run to a property I purchased. Gas company ran it for free, and installed the meter for free. Stipulation is I have at least one appliance hooked up to gas within a year. Just just ran the gas line and plumbing for an on demand water heater and the line for the range. Previous owners were generous enough to leave me a 3/4 tank of oil for free. So I’ll probably hold off on the gas furnace till next year. Biden better not ban gas/fracking anytime soon or I’m out a couple grand ;D

[LearningMachine]

Looks like Williams will be investing 15% of the capital budget longer term in the Deep Water Gulf of Mexico per https://kvgo.com/barclays/williams-september-2020.  This builds on top of their existing deep water assets, which include deepwater crude oil pipelines as well. They already have a "deepwater developmental well" project (if I heard it correctly) starting next year, and have four projects lined up.

 

Given the BP incident in the deepwater Gulf of Mexico and their subsequent decision to stop operating there, wondering if folks have thoughts on whether risks of huge losses are higher from it being harder to contain crude oil leaks in deepwater pipelines, inlets & wells compared to pipeline accidents on land?

[LearningMachine]

Unlike KMI, WMB is providing debt info for "All Equity-Method Investments" on page 106 of their 2019 Annual Report (https://s24.q4cdn.com/611644275/files/doc_financials/2019/ar/WMB_2019_AR.pdf).

 

Assuming by Non-Current Liabilities ($2,532 Million), they mean their proportional long term debt. This looks reasonable for their Equity-Method Investments of $6,235 Million on page 105.

 

However, just like KMI, when calculating their Debt-to-EBITDA ratio, they are including Proportional Modified EBITDA of equity-method investments ($746 Million) on page 144, but not consolidating, i.e. excluding, proportional debt in their Total Debt of $22,288 Million on page 126.

 

Adding $2,532 to $22,288 brings their actual Total Debt to $24,820.

 

Williams' guidance for Adjusted EBITDA for 2020 is $4.95Billion to $5.25 Billion on slide 10 of https://s24.q4cdn.com/611644275/files/doc_financials/2020/q3/3Q-'20-WMB-Earnings-Presentation.pdf.  On the same slide, they claim Debt-to-Adjusted EBITDA of 4.4x (midpoint).

 

However, using their midpoint Adjusted EBITDA (4.95+5.25/2 = $5.1Billion), their actual Total Debt (that includes proportional debt in subsidiaries) to Adjusted EBITDA ratio is 24.82/5.1 = 4.9x.  Using their lower point on the range of Adjusted EBITDA, their actual ratio is 24.82/4.95 = 5.01x.

 

In https://kvgo.com/barclays/williams-september-2020, Alan Armstrong says they are targeting to eventually get to "4.2x" Debt, which the rating agency's will adjust to "4.5x", which is required to get to Moody's BAA2 credit rating from their current BAA3 credit rating.  I wonder if those adjustments are to include total proportional debt, exclude proportional EBITDA, or something else.

[LearningMachine]

My thoughts on WMB is that they have good assets (Transco), but also a history of bad capital allocation. They kind of tend to go broke about incense decade (2001, 2009, 2015 etc) and some more recents buys (CHK gathering assets in the Marcellus) haven’t really helped either.

 

Spekulatius, I think you hit it right on! Looks like them going broke every now and then is their own making, by taking risks with unitholders' capital.  Even now, they are not shying away from taking risks.  Why do they have to get into high debt-to-EBITDA situations with BAA3 rating in the first place?  Why do they have to invest in deepwater pipes, wells & inlets? 

 

They are just a disruption away from the next time they go broke.  Disruption could be anything from deepwater or pipeline accident, interest rate spike, regulation changes, etc.

 

At BAA3 rating, they are just one notch away from non-investment grade rating, which could be triggered by such a disruption even if they don't do another bad capital allocation, which in turn can cause issues trying to renew credit line or debt.

 

Then, they will just say, oh well, we just had something happen out of our control.  So, we need to print shares for better financial repositioning, and we are so proud of our team for handling it so well (who cares about the unit holders :-)).

[Dalal.Holdings]

https://www.reuters.com/article/chesapeake-enrgy-bankruptcy-williams/update-1-williams-restructures-midstream-contracts-with-bankrupt-chesapeake-idUSL4N2I92BH

 

As part of Monday’s agreement, Chesapeake will pay all pre-bankruptcy and past receivables related to midstream expenses, as per existing contracts between the companies, Williams said.

 

Chesapeake will also enter long-term gas supply commitments of up to 150,000 decatherm per day for Williams’ Transco Regional Energy Access pipeline currently under development.

 

The producer will not reject Williams’ gathering agreements in the Eagle Ford, Marcellus or Mid Continent regions, the pipeline operator said in a statement.

 

Earlier this year, Williams, one of the largest natural gas pipeline operators, reduced its exposure to Chesapeake, to 6% of revenue from 18% five years ago, and said it expects to continue providing services amid any restructuring.

 

Williams will reduce the fees on some of Chesapeake's lines in Haynesville but get some ownership in CHK assets...this largely seems to be net positive in terms of removing the overhang from CHK bankruptcy. I believe CH 11 judge may have to approve the agreement? 

 

https://investor.williams.com/press-releases/press-release-details/2020/Williams-Announces-Global-Resolution-with-Chesapeake/default.aspx

[Dalal.Holdings]

CHK bankruptcy judge approves deal with WMB:

 

https://www.businesswire.com/news/home/20201217005904/en/

 

 

Key highlights of the approved global resolution include the following:

 

Chesapeake will pay all pre-petition and past due receivables related to midstream expenses, per the existing contracts.

 

Chesapeake will not attempt to reject Williams’ gathering agreements in the Eagle Ford, Marcellus, or Mid-Con.

 

In the Haynesville, Williams has agreed to reduce its gathering fees in exchange for gaining ownership of a portion of Chesapeake’s South Mansfield producing assets, which consist of approximately 50,000 net mineral acres. In addition, Chesapeake will enter into a long-term gas supply commitment of a minimum 100 Mdth/d and up to 150 Mdth/d for the Transco Regional Energy Access (REA) pipeline currently under development.

 

The reduced gathering fees are consistent with incentive rates that Williams has offered in the past to attract drilling capital and are therefore expected to promote additional drilling across Chesapeake’s prolific Haynesville footprint.

 

The South Mansfield assets provide an opportunity for Williams to transition the acreage to a strong and well-capitalized operator that will grow production volumes, and drive growth in fee based cash flows on Williams’ existing spare midstream capacity, while also enabling Williams to market significant gas volumes for future downstream opportunities.

 

The commitment to REA provides valuable incremental takeaway capacity for Chesapeake’s Marcellus production and the associated Williams gathering systems, while adding a valuable capacity commitment to the Transco project.

[Dalal.Holdings]

Unlike KMI, WMB is providing debt info for "All Equity-Method Investments" on page 106 of their 2019 Annual Report (https://s24.q4cdn.com/611644275/files/doc_financials/2019/ar/WMB_2019_AR.pdf).

 

Assuming by Non-Current Liabilities ($2,532 Million), they mean their proportional long term debt. This looks reasonable for their Equity-Method Investments of $6,235 Million on page 105.

 

However, just like KMI, when calculating their Debt-to-EBITDA ratio, they are including Proportional Modified EBITDA of equity-method investments ($746 Million) on page 144, but not consolidating, i.e. excluding, proportional debt in their Total Debt of $22,288 Million on page 126.

 

Adding $2,532 to $22,288 brings their actual Total Debt to $24,820.

 

Williams' guidance for Adjusted EBITDA for 2020 is $4.95Billion to $5.25 Billion on slide 10 of https://s24.q4cdn.com/611644275/files/doc_financials/2020/q3/3Q-'20-WMB-Earnings-Presentation.pdf.  On the same slide, they claim Debt-to-Adjusted EBITDA of 4.4x (midpoint).

 

However, using their midpoint Adjusted EBITDA (4.95+5.25/2 = $5.1Billion), their actual Total Debt (that includes proportional debt in subsidiaries) to Adjusted EBITDA ratio is 24.82/5.1 = 4.9x.  Using their lower point on the range of Adjusted EBITDA, their actual ratio is 24.82/4.95 = 5.01x.

 

In https://kvgo.com/barclays/williams-september-2020, Alan Armstrong says they are targeting to eventually get to "4.2x" Debt, which the rating agency's will adjust to "4.5x", which is required to get to Moody's BAA2 credit rating from their current BAA3 credit rating.  I wonder if those adjustments are to include total proportional debt, exclude proportional EBITDA, or something else.

 

I agree that debt may be slightly understated; however I guess it is a fraction of non-current liabilities in equity method investments (not the whole thing). I guess total debt is maybe mid single digit higher than the headline figure.

 

Another positive recent headline from the co (cash flows coming in earlier than expected):

https://www.businesswire.com/news/home/20201218005314/en/

 

The following projects attained early in-service capacity in the fourth quarter:

 

Transco’s Leidy South, an expansion of Williams’ existing Pennsylvania energy infrastructure, brought 125 MMcf/d of capacity on line in November with the remaining 457 MMcf/d expected to be complete in 2021. The expansion connects robust Appalachia natural gas supplies with growing demand centers along the Atlantic Seaboard and has received key state and federal permits, including a partial FERC Notice to Proceed.

 

Southeastern Trail, a Transco transmission expansion project to serve growing demand in the Mid-Atlantic and Southeastern U.S., commenced partial in-service of 150 MMcf/d in November and an additional 80 MMcf/d in December. The balance of the 296 MMcf/d project is expected to come on line in the first quarter of 2021.

 

Bluestem Pipeline, a 120 Mbbls/d natural gas liquids (NGL) transportation pipeline that provides improved market access and liquidity for mixed NGLs, was completed under budget and began service in December, two months ahead of schedule.