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On Monday, May 2, 2022, natural gas-focused pipeline giant The Williams Companies, Inc. (NYSE:WMB) announced its first-quarter 2022 earnings results. The Williams Companies has long been a stalwart in the midstream industry, boasting one of the largest natural gas pipeline systems in the United States. The company has historically boasted incredibly stable cash flows through any economic conditions and, owing to the strong fundamentals of natural gas, fairly strong growth prospects. We certainly see both of these aspects reflected in these results, which should delight investors. Even better, The Williams Companies managed to expand its growth potential through a few positive developments during the quarter. Overall, The Williams Companies continues to earn its place as a stalwart in the portfolio of any income-focused investor.
As my long-time readers are no doubt well aware, it is my usual practice to share the highlights from a company’s earnings report before delving into an analysis of its results. This is because these highlights provide a background for the remainder of the article as well as serve as a framework for the resultant analysis. Therefore, here are the highlights from The Williams Companies’ first quarter 2022 earnings results:
- The Williams Companies reported total revenues of $2.524 billion during the first quarter of 2022. This represents a 3.37% decrease over the $2.612 billion that the company reported in the prior-year quarter.
- The company reported an operating income of $654 million during the reporting period. This represents a substantial 11.50% decline over the $739 million that the company reported in the year-ago quarter.
- The Williams Companies received contracts from its customers to proceed on the Texas to Louisiana Pathway Project. This project is intended to supply 364 million cubic feet per day of natural gas feedstock to liquefied natural gas producers.
- The company reported available funds from operations of $1.190 billion in the most recent quarter. This represents a 15.65% increase over the $1.029 billion that the company achieved in the equivalent quarter of last year.
- The Williams Companies reported a net income of $379 million during the first quarter of 2022. This represents a 10.82% decline over the $425 million that the company reported in the first quarter of 2021.
Although The Williams Companies did see a year-over-year decline in both operating and net incomes, this is not necessarily a sign of negative growth. That is because these metrics are not particularly relevant for a midstream company. These are merely accounting figures that are used for tax purposes and are subject to a number of inputs that do not actually represent money entering into, or out of, the business. A midstream company tends to have a number of these things, most notably depreciation and amortization, that reduce net income but could actually be a result of the company constructing new infrastructure and thus increasing its depreciation expense. The most relevant measure for The Williams Companies is cash flow, which the company expresses through adjusted EBITDA and available funds from operations. These metrics were both up year-over-year:
Q1 2022 Q1 2021 Adjusted EBITDA $1,511 $1,415 Available FFO $1,190 $1,029
(all figures in millions of U.S. dollars)
One of the biggest reasons for this growth is that the company saw the volume of natural gas moving through its infrastructure increase over the year. This makes sense because The Williams Companies makes its money by charging its customers based on the volume of natural gas moving through its infrastructure and not its value. This provides a great deal of insulation against commodity price fluctuations, which can work both for and against the company. As we can see in the highlights, The Williams Companies’ revenues certainly did not benefit from the fact that natural gas prices were substantially higher in the first quarter of 2022 than in the first quarter of 2021. Although cash flows were up year-over-year, it was not nearly to the degree of natural gas prices:
Although The Williams Companies does not directly benefit from increases in natural gas prices, it does benefit in ancillary ways. This is because the producers of natural gas tend to increase their production of the compound during times when prices are high. Although producers are generally more cautious than prior to the pandemic, they have been increasing production over the past year. As I discussed in a recent article, the production of natural gas in the Bakken shale has been gradually increasing over the past year. The same has been true in the Haynesville shale, where The Williams Companies has significant natural gas gathering assets. This trend benefited the company during the quarter as the gathering pipelines carried higher volumes of natural gas than in the year-ago quarter, resulting in higher cash flows. Investors should certainly be pleased with this development.
Naturally, we do not only care about The Williams Companies’ performance in the current quarter, we want to see that the firm has the potential to reward us with forward growth. Fortunately, this company does not disappoint in this regard. As we can see here, The Williams Companies currently has six projects under development valued at $1.5 billion that are expected to come online between now and 2025:
We have discussed a few of these projects in various previous articles on the company. One of the most significant of these though is the new one that was mentioned in the highlights, the Texas to Louisiana Pathway. The company has not divulged much information about this project yet but presumably, it will be a natural gas pipeline running from an origin point in Texas to a destination point in Louisiana. The company has stated that it will be capable of carrying 364 million cubic feet of natural gas per day to support the emerging liquefied natural gas production plants located in Southern Louisiana, with more under construction. This pipeline is certainly intended to supply them with the natural gas feedstock that they require to produce their products. As stated earlier, The Williams Companies has now secured sufficient contracts from customers, presumably the owners of the liquefaction plants, to proceed with the construction of this pipeline. This is something that this company often does before embarking on a new infrastructure project of this scale for a very good reason. These contracts ensure that the company is not spending an enormous amount of money to construct a pipeline that nobody wants to use. We can also be certain that the project will begin generating positive cash flow once it becomes operational, which will directly boost The Williams Companies’ financial performance. As this pipeline is expected to come online in late 2025, we can expect to see its impact on the company’s cash flows around that time.
The emerging liquefied natural gas industry could prove to be a very long-term source of growth for The Williams Companies. The company’s president and CEO, Alan Armstrong, stated as much in the earnings press release,
As we look overseas to the energy crisis in Europe, we recognize the need for reliable, affordable, and clean energy that can keep up with the growth that the world demands on a global scale. Williams has critical infrastructure connected to the best natural gas basins in the United States to serve these growing needs. Our organization is excited about stepping up to meet these challenges, and we will deliver on these opportunities.
As natural gas must be converted into a liquid in order to be exported overseas, it is clear that Mr. Armstrong is referring to the liquefied natural gas export industry. He specifically mentions the energy crisis in Europe. While it is true that Europe is looking to the substance as a way to reduce its dependence on Russia but it is Asia that is likely to be the driver of demand growth as various countries attempt to reduce their smog and pollution problems. As a result of these factors, the global demand for liquefied natural gas is expected to increase by 40% by 2030:
The United States is one of the few regions of the world that can increase its production of natural gas in order to meet this demand. This is one of the reasons why the liquefied natural gas export industry is growing so rapidly here. The Williams Companies transports more than 30% of all the natural gas produced in the nation and its Transco system is by far the largest transmission system in the eastern half of the country. It only makes sense that it will be one of the major supplies of natural gas feedstock to the industry, which would obviously increase its cash flows. It would overall not be surprising if we see the company announce further new projects dedicated to supporting this industry as time goes on.
One of the biggest reasons why many people invest in The Williams Companies is the high yield that the stock boast. Indeed, as of the time of writing, The Williams Companies yields 4.64%, which is substantially higher than most other things in the market. Even better, the company has a long history of steadily growing its payout:
The fact that the company steadily grows its dividend over time is particularly appealing in an inflationary environment such as the one that we are in today. This is because inflation steadily reduces the number of goods and services that can be purchased with the dividend. Thus, the fact that the company is providing more and more money every year helps the investors purchase the same things that they could before. As is always the case though, it is critical that we ensure that the company can actually afford the dividend that the firm pays out. After all, we do not want it to be suddenly forced to reverse course and cut the dividend since that would reduce our incomes and probably the stock price.
The usual way that we judge the company’s ability to pay its dividend is by looking at the available funds from operations, which is a measure that theoretically tells us the amount of cash generated by the company’s ordinary operations that is available to be distributed to the common stockholders. As noted in the highlights, The Williams Companies reported available funds from operations of $1.190 billion in the most recent quarter. This was sufficient to cover the company’s dividend 2.30 times over, which is very reasonable. Analysts generally consider anything over 1.20x to be very reasonable and sustainable, which The Williams Companies handily exceeds. As we can clearly see, the company’s dividend appears to be highly sustainable.
In conclusion, these were very good results, which is somewhat what we have come to expect from this company. The big thing that we see here though is that The Williams Companies has apparently expanded its operations into supporting the emerging natural gas liquefaction industry, which could provide it with a great deal of forward growth potential. The company’s yield is admittedly not as high as some peers but it is very well supported and the likelihood of dividend growth is very attractive given the impact that inflation has begun to have on many budgets. Overall, The Williams Companies certainly earns its place in anyone’s portfolio.