Natural gas company The Williams Companies, Inc. (WMB) , boasting a market cap of over $43 billion, recently outperformed third-quarter estimates, driven by increasing revenues generated from its midstream business.
The inherent qualities of the midstream business model mean that oil and gas pipeline transportation and storage activities are relatively shielded from fluctuations in commodity pricing. WMB generates profit when customers utilize its infrastructure under fee-based and non-cash commodity contracts within its gathering business. To counterbalance specific commodity price risks, the company employs hedging strategies.
Notably, 80% of WMB's customer base are investment-grade companies, which reduces the risk of financial instability during adverse economic climates. Additionally, utilities and power entities constitute 68% of its clientele, further bolstering its low-risk profile.
WMB operates as a crucial intermediary connecting energy producers to consumers, thereby reaping benefits from the surging demand for energy infrastructure and the transition to more environment-friendly energy sources, including natural gas.
The company is proactively contributing to the clean energy transition with heightened efforts toward developing clean hydrogen commercially. WMB asserts that natural gas is pivotal in satiating the escalating energy demands and concurrently reducing pollutant emissions. The Biden administration's support of Mountain Valley Pipeline completion highlights the critical need for robust natural gas infrastructure.
Pipeline operators like WMB stand to gain considerably when natural gas demand surges, enabling these companies to capitalize on service revenue, which makes up most of their sales. With the potential rise in natural gas demand , WMB's commitment to leveraging its expansive natural gas infrastructure for sustainable growth could be lucrative.
WMB continues to uphold its broad operational reach, which extends across 14 strategically vital supply areas. As an energy infrastructure titan, WMB forecasts considerable future growth. In recent developments, the pipeline giant has committed to several acquisitions and authorized additional expansion initiatives, effectively extending its visible growth trajectory through the upcoming years. Moreover, further projects are underway.
Transco's Regional Energy Access project was concluded ahead of the anticipated timeline, with full-rate revenues to commence in late October. It is expected that the signing of the precedent agreements for the Southeast Supply Enhancement project is likely to boost EBITDA.
Bayou Ethane Pipeline system was sold for $348 million in cash, or over 14 times the adjusted EBITDA. The subsequent revenue was allocated toward procuring Cureton Front Range and its joint venture partner's 50% interest in Rocky Mountain Midstream, resulting in complete ownership by WMB. A total of $1.27 billion was spent on these acquisitions, equating to roughly 7x the adjusted EBITDA.
Over the next year, as the new assets are amalgamated into the existing portfolio, the acquisitions are projected to boost the company's cash flow and streamline regional operations.
WMB extends an appealing proposition for investors seeking both growth and steady income. It exhibits a firm growth track, with its net income growing at a 5.2% CAGR over the past five years. The natural gas pipeline giant delivers an impressive 5.1% dividend yield on the current share price, catering to income-driven investors.
The growth has enabled WMB’s dividend to grow at a 6% CAGR over the same period. The solid mix of its consistent dividend income and steadfast growth could generate considerable returns in the forthcoming years.
But what’s driving this growth?
For the nine months that ended September 30, 2023, the company reported generating over $5 billion EBITDA, reflecting an 8.9% year-over-year increase despite the declining natural gas prices. Consequently, the pipeline company is on course to yield $6.7 billion of adjusted EBITDA this year, surpassing its previous guidance range by $100 million.
Further strengthening its financial health, WMB’s Available Funds from Operations (AFFO) have marked a 9.2% year-over-year surge to $3.89 billion. This rise has sufficiently cushioned the firm's cash reserves to cover its dividend by 2.38 times, presenting a 3.9% improvement from the year-ago period, even after incorporating its 5.3% dividend increase this year.
The key propellants stimulating this growth are multi-faceted, encapsulating the robust performance of its underlying business, the fruition of recently finalized expansion projects, and strategic acquisitions.
WMB has an impressive record of paying dividends to its shareholders for 33 consecutive years, growing it for five consecutive years. Given its financial strength, the company is unlikely to cut its dividend in the future. The dividend in 2023 was increased to $1.79 from $1.70 in 2022.
Bottom Line
WMB is projected to sustain steady growth in the upcoming years. Enhanced by recent acquisitions of organic expansion projects and strategic transactions, the company solidifies its already strong growth prospects. These secured projects are expected to fuel an annual earnings growth of 5% to 7%.
The company's commitment to natural gas infrastructure illustrates a comprehensive strategy that recognizes the evolving energy landscape and underscores dedication to sustainability, reliability, and substantial growth. This approach has thus far proven beneficial for the business, demonstrated by its assets that grew at a 6.7% CAGR over the past 10 years.
Strong natural gas demand could significantly boost the company, given the increasing need for electricity generation . Consequently, WMB may encounter heightened demand, offering the potential for significant cash flow returns to shareholders and a robust dividend yield.
WMB's capabilities to deliver cash flows for investors and enhance dividends should be prioritized. Maintaining the company's leverage ratio within a reasonable range will facilitate this sustainability.
A positive development was marked by a dip in WMB’s debt-to-adjusted EBITDA to 3.45x from 3.68x in the year-ago quarter. The strong capital cushion amid high-interest rates could serve them well in the future and boost the share price.
Shareholders are set to benefit from an impressive growth backlog, including completing seven out of nine significant pipeline projects scheduled for the fourth quarter of 2024.
Though dividends may serve as a luring feature when purchasing shares, the existing yield of 5.1% presented by WMB may dishearten investors, given that comparable superior-quality stocks within the sector provide more substantial yields. Even though WMB has capitalized on prevailing industry trends, prospective long-term investors may be inclined towards alternatives boasting greater returns.
Wall Street analysts expect the stock to reach $38.82 in the next 12 months, indicating a potential upside of 10.5% upside of 10.5%. Should there be no change in the dividend rate, falling dividend yields could be expected.
WMB’s robust financial stability, risk-averse customer base, and sustained growth in dividends make it an attractive option for income-oriented investors. Considering its 6% rally in the stock witnessed so far, the dividend yield is not particularly enthusing – especially considering that WMB's contemporaries also boast comparable growth potential.
A possible correction in the future could potentially optimize the risk-reward balance. On these grounds, it would be wise to wait for a better entry point in the stock.
