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Will Williams Companies Inc. Keep Its Growth Streak Alive in the Third Quarter?

By Matthew DiLallo - Oct 31, 2017 at 10:31AM

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The pipeline and processing giant faced several headwinds in the quarter, which might have ended its earnings growth streak.

Williams Companies (WMB -2.29%) has been on quite a roll. Despite a turbulent oil market, the energy midstream giant, through its majority stake in master limited partnership Williams Partners (NYSE: WPZ), has delivered 15 consecutive quarters of year-over-year growth in adjusted EBITDA. However, the companies faced several headwinds in the third quarter that could halt that streak.

Here's a closer look at what might impact that number, which the company will release on Wednesday after markets close.

Headwind No. 1: The Geismar sale

In early July, Williams Partners completed the sale of its stake in the Geismar petrochemical plant in Louisiana for $2.1 billion. That transaction did several things for the company, including giving it the cash to pay off an $850 million term loan and prefund future capex as well as secure a long-term, fee-based supply agreement with the new owner. Those positives aside, it lost a meaningful earnings contributor, which will have an impact on third-quarter results. 

Sunset through the twists of a pipeline system.

Image source: Getty Images.

Last quarter, for example, that entity helped the company's NGL and petchem services segment to produce $23 million of adjusted EBITDA. Meanwhile, earnings would have been $22 million higher if not for an unexpected power outage at Geismar, which caused volumes at the facility to fall. To put the impact into perspective, Williams' adjusted EBITDA increased $48 million last quarter. Given that number, growth would have come in about 50% less last quarter without Geismar's earnings or they could have been 50% higher if not for the power outage.

Headwind No. 2: Hurricane Harvey

In addition to the lost income from Geismar, Williams Partners' assets along the Gulf Coast experienced a variety of impacts when Hurricane Harvey slammed into the coast of Texas. While the company put out a press release in early September stating that Harvey didn't cause any major damage to its facilities in the Gulf Coast, it did shut down some assets in preparation for the storm, while many customers shut in production as a precaution.

For the most part, the storm shouldn't have had much of an impact on Williams' results since many of its contracts have minimum volume commitments, which means customers pay it a fee even if they don't use its assets. That said, the company does earn some volume-based fees, so it's possible that the storm will dampen those earnings in the quarter.

An oil well with storm clouds above.

Image source: Getty Images.

Headwind No. 3: Not an easy comparable quarter

In addition to those headwinds, Williams is going up against a tough comparison since adjusted EBITDA topped $1.2 billion in last year's third quarter. That's well above the $1.104 billion it pulled in during the second quarter, which is down from the peak due to the sale of its Canadian assets.

That said, on a more positive note, Williams should benefit from several recently completed growth projects. The company noted in last quarter's earnings release that it brought three expansion projects on line this year. Furthermore, it's worth noting that one entered service in mid-July while the other didn't start up until early August. Because of that timing, they'll be meaningful contributors in the third quarter. Meanwhile, in early September the company placed a portion of its large Atlantic Sunrise project into service, which will also bolster results in the third quarter. However, despite the growth supplied by these projects, it doesn't appear that they will supply enough to offset all the headwinds. 

Setting the stage for the next streak

Given the headwinds, it seems like Williams' earnings growth streak will come to an end in the third quarter. However, it should only be a brief step back since Williams Partners expects to complete a steady stream of growth projects over the next few years. Those expansions position the MLP to grow its 6.5% yielding distribution by a 5% to 7% annual rate, which will fuel 10% to 15% annual growth in Williams Company's 4.2% dividend. Because of that growth outlook, income investors should keep an eye out to see if either company sells off after reporting earnings because that could be an opportunity to lock in an even more lucrative long-term income stream.

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