After giving it fits over the past several quarters, Williams Companies' (WMB -0.27%) growth engine roared back to life in the third quarter. The pipeline giant posted strong earnings and cash flow growth, fueled by its recent strategic initiatives, as well as rising natural gas volumes across its systems. Meanwhile, with several recently completed expansion projects, the company's growth engine should continue humming along for the foreseeable future.
Drilling down into the results
|
Metric |
Q3 2018 |
Q3 2017 |
YOY Change |
|---|---|---|---|
|
Adjusted EBITDA |
$1.196 billion |
$1.113 billion |
7.5% |
|
Distributable cash flow |
$768 million |
$603 million |
27% |
|
Dividend coverage ratio |
1.86 times |
1.51 times |
23.2% |
Data source: Williams Companies. YOY = Year over year.
Williams Companies delivered strong earnings growth and an even more robust increase in cash flow due in part to recently completed acquisitions, which included buying out its master limited partnership (MLP) and partnering with private equity giant KKR (KKR -1.35%) to acquire Discovery DJ Services. Those strategic transactions helped boost an already strong underlying business:
Data source: Williams Companies. Chart by the author.
Earnings in Williams' Atlantic-Gulf segment surged 11%, driven primarily by the completion of five expansion projects on the company's Transco pipeline system. That more than offset some weakness in one of its offshore service facilities due to declining production in the field it supports.
Williams' northeast gathering and processing business also delivered strong year-over-year growth, with earnings in the segment surging 14%. Fueling that segment's earnings growth was rising volumes across its gathering and processing systems in the Marcellus and Utica shale regions thanks to improving market conditions.
The only weak spot was the company's west segment, where earnings slipped less than 1%. While its assets in this region earned higher margins thanks to rising commodity prices, lower rates on the Northwest Pipeline due to a change in the tax law more than offset that positive. This segment will likely remain weaker in the near term since Williams agreed to sell its Four Corners Area business, which closed after the quarter ended. However, its recent deal with KKR should enable the company to eventually offset that lost income as its growth projects enter service in the coming years.
Image source: Getty Images.
A look at what's ahead
"This quarter's strong execution and results highlight why we are so bullish on the future," stated CEO Alan Armstrong in the earnings press release. He noted that the company's strong showing during the quarter has it on pace to deliver full-year results toward the upper end of its financial guidance. Another factor driving that view is that Williams Companies placed its $3 billion Atlantic Sunrise project into service in early October, meaning it will supply the company with a near-term boost to earnings and cash flow.
Meanwhile, the company has another large project on Transco, the Gulf Connector, that will come online next year and when combined with Atlantic Sunrise, will "drive even higher growth in fourth-quarter 2018 and 2019 on Transco," according to comments by Armstrong. On top of that near-term income boost, "Atlantic Sunrise has opened up new markets for Marcellus producers, and that is now driving accelerated growth in our Northeast G&P business segment." Armstrong further noted that "this growth will continue for many years, and immediately upon the heels of Atlantic Sunrise, we have announced another fully contracted expansion out of the Northeast Pennsylvania area to serve growing markets with Transco's Leidy South Expansion." Add those projects to its rapidly expanding gathering and processing business in both the northeast and west, and it's easy to see why Williams' CEO is so bullish on the company's future.
A great income stock for the long haul
Williams Companies third-quarter results demonstrate that the company's strategic plan is paying dividends. Not only did earnings and cash flow rise sharply, but the company sees even more growth ahead thanks to recently completed and upcoming expansion projects. Those factors position the company to grow its 5.6%-yielding dividend by at least a double-digit pace over the next year, with continued high-octane growth likely in 2020 and beyond.
