Williams Companies, Inc.
/ (WMB-NYSE)/ Equity Research / WMB | Page 1
Current Recommendation / NEUTRAL
Prior Recommendation / Underperform
Date of Last Change / 01/14/2015
Current Price (01/13/15) / $40.94
Target Price / $43.00
SUMMARY
We are upgrading our investment thesis on Williams Companies to Neutral from Underperform. The midstream assets of the company generate a steady flow of revenues as these are less sensitive to commodity prices. Williams has also designed Hillabee Expansion Development in order to expand the capacity of its Transco pipeline system in Alabama. Once the project comes online, Williams will be able to carry significantly more natural gas that will serve the electricity-generation needs of four million American households. However, we remain worried as the company has a high debt burden, which might restrict its near-term growth prospects./ Equity Research / WMB | Page 1
SUMMARY DATA
52-Week High / $59.4452-Week Low / $38.88
One-Year Return (%) / 10.44
Beta / 1.32
Average Daily Volume (sh) / 7,722,748
Shares Outstanding (mil) / 747
Market Capitalization ($mil) / $30,601
Short Interest Ratio (days) / 2.13
Institutional Ownership (%) / 88
Insider Ownership (%) / 4
Annual Cash Dividend / $2.28
Dividend Yield (%) / 5.57
5-Yr. Historical Growth Rates
Sales (%) / -9.8
Earnings Per Share (%) / -7.2
Dividend (%) / 41.0
P/E using TTM EPS / 46.5
P/E using 2015 Estimate / 31.5
P/E using 2016 Estimate / 27.5
Zacks Rank *: Short Term
1 – 3 months outlook / 3 - Hold
* Definition / Disclosure on last page
Risk Level * / Average,
Type of Stock / Large-Value
Industry / Oil-Prod/Pipeln
Zacks Industry Rank * / 167 out of 267
OVERVIEW
Tulsa, Oklahoma-based Williams Companies, Inc. (WMB) is a premier energy infrastructure provider in North America. The company’s core operations include finding, producing, gathering, processing, and transportation of natural gas. Boasting of a widespread pipeline system, Williams is one of the largest domestic transporters of natural gas by volume. Its facilities – gas wells, pipelines, and midstream services – are concentrated in the Northwest, Rocky Mountains, GulfCoast, and Eastern Seaboard.
Williams owns/holds operating interests in 15,000 miles of interstate gas pipelines, 1,000 miles of natural gas liquids (NGL) transportation pipelines, and more than 10,000 miles of oil and gas gathering pipelines. The company has a combined processing capacity of 6.6 billion cubic feet of natural gas per day, and more than 200,000 barrels of NGL per day.
Williams divides its business into four segments: Williams Partners (contributed more than 90% of the company’s 2013totalprofit), Williams NGL & Petchem Services, Access Midstream Partners, and Other.
- Williams Partners: Williams Partners segment includes the company’s72%-owned (including the general-partner interest) master limited partnership Williams Partners L.P. (WPZ), consisting of most of the company's interstate gas pipeline and midstream assets.Williams Partners L.P. owns interests in three major interstate natural gas pipelines, which together transport 14% of the natural gas consumed in the U.S. The partnership's gathering and processing assets comprise large-scale operations in the U.S. Rocky Mountains and both onshore and offshore along the Gulf of Mexico.
- Williams NGL & Petchem Services:This unit consists of Williams’ oil sands off-gas processing plant near Fort McMurray, Alberta, its NGL/olefin fractionation facility and butylene/butane splitter plant at Redwater, Alberta, its light-feed olefins cracker in Geismar, Louisianatogether with related ethane and propane pipelines, and the company’s refinery grade splitter in Louisiana.
- Access Midstream Partners:The segment includes the company’s earnings from its 50% stake in natural gas partnership Access Midstream Partners L.P. and a 100% interest in its general partner – Access Midstream Partners GP LLC.
- Other: Williams’ ‘Other’ segment includes the company’s business activities that are not operating segments, primarily a 25.5% interest in Gulfstream, as well as corporate operations.
In Dec 2011, Williams completed the spin-off of its exploration and production business into a separate, independent and publicly traded company WPX Energy Inc. (WPX).
REASONS TO BUY
Williams’ midstream assets, which are less sensitive to commodity prices, help the company to maintain a steady stream of revenue and cash flow even if natural gas prices stay low. Furthermore, Williams is poised to benefit from the rebound in industrial activity, which will include increased natural gas demand in the form of natural gas liquids.
Williams has designed Hillabee Expansion Project – likely to commence in May 2017 – for the expansion of its Transco pipeline system in Alabama. It is expected that the improved capacity will be enough to meet the annual natural gas demand − for electricity generation − of more than 4 million American households.
In Nov 2014, Williams approved a raise in its quarterly cash dividend to $0.57 per share ($2.28 per share annualized), representing an increase of 50% over the year-ago payout. Moreover, the company’s dividend for 2014 is $1.96 per share, up 36% from $1.44 paid out in 2013. All these reflect Williams’ strong commitment to create value for shareholders.
On Jul 2014, Williams completed the purchase of the remaining 50% GP interest and 55.1 million LP units in Access Midstream Partners LP – thereby having full GP ownership and 50% LP interest in the Oklahoma City-based partnership. We believe that with the acquisition, Williams has significantly improved its transportation and midstream businesses as Access Midstream holds a strong portfolio of natural gas pipelines and gathering assets in the Marcellus, Barnett, Utica, Haynesville, Eagle Ford, Mid-continent and Niobrara shale regions.
In particular, the growth prospects for energy infrastructure all across North America remain exciting with the requirement to support producers in the growth of shale plays, especially in regions where there is a severe lack of facilities. This creates exciting opportunities for a pipeline firm like Williams, as it looks to capture the economic benefit of this trend.
REASONS TO SELL
Williams’ extensive natural gas exposure raises its sensitivity to the commodity’s price, which continues to be volatile. This translates into an uncertain near- to medium-term outlook for the company.
We believe that transfer of the upstream assets (post-split) hasleft Williams with a less diversified business. As a result, the business risk profile of the reorganized Williams is weaker than that of the pre-spin-off company.
Williams’ keep-whole and percentage-of-liquids basis contracts for its midstream assets expose the company to commodity price risk. If these contracts become less profitable, cash flow from Williams’ midstream business could be adversely affected, thereby leading to underperformance.
We remain concerned about Williams Companies’ high debt levels, which leave it vulnerable to an extended drop in commodity prices. As of Sep 30, 2014, Williams had long-term debt of almost $20.0 billion, representing a debt-to-capitalization ratio of 69.6%.
As of now, Williams Companies’ operating subsidiary – Williams Partners – has very little hedging arrangements for its NGL production. This heightens the partnership’s (and consequently parent Williams Companies’) near-term commodity-price exposure, which is a key negative, given current market concerns.
RECENT NEWS
Williams Companies Hikes Q4 Dividend, Will Expand Pipeline
On Nov 18, 2014, Williams Companies declared fourth-quarter 2014 cash dividend of $0.57 per share. The dividend reflects a sequential hike of almost 2% and a year-over-year increase of 50%. Williams paid the dividend on Dec 29, 2014, to shareholders of record as of Dec 12.
Williams’ dividend for 2014 is $1.96 per share, reflecting a hike of 36% from $1.44 paid out in 2013.
Moreover, Williams retained its previous dividend projection of $2.46 for 2015. For 2015 through 2017, the company plans a 15% dividend hike, as declared previously.
Separately, Williams declared that in order to meet the growing demand for clean burning natural gas in the southeastern region of the U.S., Transco – an affiliate of Williams Partners − seeks approval from the Federal Energy Regulatory Commission for expanding its pipeline system. Williams is the general partner and has a controlling interest in Williams Partners.
Williams has designed Hillabee Expansion Project – likely to commence May 2017 – for capacity expansion of the Transco pipeline system in Alabama. The improved capacity – which will comprise manufacture of extra pipe segments covering 43 miles along with modification of existing pipelines − will transport increased natural gas from Choctaw County to Tallapoosa County in Alabama.
Hillabee Expansion Project is expected to operate in three phases which will likely add roughly 1,131,000 dekatherms per day to the transportation capacity of Transco by May 2021. Williams added that the expanded capacity is enough to meet the annual natural gas demand – for electricity generation − of more than 4 million American households.
Williams revealed that roughly $4.5 billion capital will likely be allocated to the Transco growth project − the nation’s highest-volume natural gas transmission system – and its sub-part, Hillabee Expansion.
Third Quarter 2014 Results
On Oct 29, 2014,Williams Companies reported third-quarter 2014 adjusted earnings from continuing operations of $0.15 per share, which failed to beat the Zacks Consensus Estimate of $0.22. Moreover, the bottom line decreased 21% from the prior-year quarter level of $0.19.
Significant increase in operating and maintenance cost along with decreased performance by the company’s largest income generating business segment − Williams Partners – hampered the results.
However, for the quarter ended Sep 30, Williams Companies reported revenues of $2,069 million, up 27.5% year over year. Revenues also surpassed the Zacks Consensus Estimate of $1,867 million. The improvement came on the back of higher service revenues and increased product sales.
Segmental Analysis
Williams Partners: This segment reported adjusted operating profit of $366 million in the quarter, down 7% from $394 million in the year-ago quarter. Significant decreases in natural gas liquid and marketing margins were responsible for the decline.
Williams NGL & Petchem Services: The unit registered adjusted operating loss of $3 million, narrower than the third-quarter 2013 loss of $4 million.
Access Midstream Partners: The segment reported an adjusted operating profit of $85 million against $6 million in the year-ago quarter. The considerable improvement was owing to Williams’ increased ownership in Access Midstream Partners LP.
Other: The segment posted adjusted operating income of $1 million against loss of $1 million the prior-year quarter.
Operating and Maintenance Expenses
Operating and maintenance expenses were recorded at $412 million, 53% higher than $269 million in the third quarter of 2013.
Capital Expenditure & Balance Sheet
During the reported quarter, Williams Companies’ capital expenditure came in at $1,104 million. As of Sep 30, 2014, the company had long-term debt of $19,922 million, representing a debt-to-capitalization ratio of 69.6%. Williams Companies has a cash balance of about $302 million.
Guidance
Williams Companies is expected to invest roughly $4,880 million in 2014, $3,645 million in 2015 and $3,470 million in 2016, in line with the prior plan.
The earlier projected annualized dividend of $1.96 and $2.46 for 2014 and 2015, respectively, stays. For 2015 through 2017, the company plans a 15% dividend hike, as declared previously.
Other News
On Oct 26, 2014, Williams Companies declared that Williams Partners and Access Midstream Partners would be merged. The merger is expected to be completed by the first half of 2015. Williams also has a plan to drop down its residual NGL & Petchem Services businesses to Williams Partners either by the end of this year or by early 2015.
Post merger, the combined entity will likely become large cap master limited partnership, with diversified midstream asset bases in North America.
VALUATION
Williams’ midstream properties generate a steady flow of income as its assets are less sensitive to commodity prices. The company will also expand the capacity of its Transco pipeline system in Alabama. With the increased capacity, Williams will be able to carry enough natural gas for meeting the demand – for electricity generation − of 4 million households in America.
However, we are concerned about the future of Williams as it has significant exposure to debt.
This is corroborated by our new Neutral recommendation.
Williams’ current trailing 12-month earnings multiple is 46.5x, compared with the 30.5x industry average and 18.6x for the S&P 500. Over the last five years, shares of Williams Companies have traded in a wide range of 15.5X to 64.6X trailing 12-month earnings.
Our $43 price objective reflects a 2015 P/E multiple of 33.1x, which is within historical trading ranges.
Key Indicators
Earnings Surprise and Estimate Revision History
DISCLOSURES & DEFINITIONS
The analysts contributing to this report do not hold any shares of WMB. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts’ personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts’ compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1106 companies covered: Outperform - 15.2%, Neutral - 78.7%, Underperform – 5.8%. Data is as of midnight on the business day immediately prior to this publication.
Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company’s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock’s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively.
Analyst / Nilanjan BanerjeeEditor / Sudipta Mukherjee
QCA
Lead Analyst / Nilanjan Choudhury
Nilanjan Choudhury
Reasons for Update / Earnings Update
/ Equity Research / WMB | Page 1