Williams Companies' Growth Engine Continued Humming Along in Q1

Williams Companies' (WMB 1.21%) growth strategy continues to pay off. The natural gas pipeline company's dual focus on building its portfolio around its core assets and investing in high-return growth projects enabled it to generate solid earnings and cash flow growth during the first quarter. That kept the company on track to achieve its full-year forecast even though it has continued to tweak its portfolio in 2019.

Drilling down into the numbers

Data source: Williams Companies. YOY = year over year.

Williams didn't disappoint during the first quarter, as earnings and cash flow grew by more than 7% compared to the prior-year period. That allowed the company to increase its dividend by 12% over the past year even as it maintained a healthy coverage level.

The pipeline giant benefited from strong performance in two of its three main segments:

Data source: Williams Companies. Chart by the author.

Earnings in Williams' Atlantic-Gulf segment surged more than 20% compared to the year-ago period. The main reason was the completion of the Atlantic Sunrise and Gulf Connector expansion projects on its key Transco pipeline.

Northeast G&P earnings also soared more than 20% year over year. The company benefited from a 15% increase in volumes gathered across the region. Williams also acquired the remaining 38% interest in Utica East Ohio Midstream during the quarter for $727 million. That's part of a $1.34 billion transaction that will see the company sell a 35% stake in that entity and its Ohio Valley Midstream system to create a partnership with the Canadian Pension Plan Investment Board. The joint venture should close later this year.

The strong results of those two segments more than offset some weakness in Williams' West business unit. The company experienced lower volumes due to severe winter weather conditions, especially in Wyoming. In addition to that, the company sold its Four Corners area business last year, which also weighed on comparable results. Meanwhile, this segment could be under additional pressure because Williams recently sold its 50% stake in Jackalope Gas Gathering Services, which is a G&P business in Wyoming.

Image source: Getty Images.

A look at what's ahead

Williams will receive about $1.085 billion in cash as a result of its partnership with the Canadian Pension Plan Investment Board and sale of its stake in Jackalope. The company intends on using those proceeds to shore up its balance sheet and finance additional expansion projects. That will help reduce its leverage ratio to about 4.6 times debt to EBITDA by the end of 2019, which is an improvement from its initial guidance of 4.75 times.

Williams is also reducing its capital expenditure outlook for 2019. The company now expects to spend between $2.4 billion and $2.8 billion, which is down from its initial budget range of $2.7 billion-$2.9 billion. That's due to the sale of Jackalope, as well as lower-than-anticipated capital spending in the Northeast.

Williams, however, isn't adjusting its forecast for adjusted EBITDA, distributable cash flow (DCF), or dividend coverage. It still sees adjusted EBITDA coming in the range of $4.85 billion-$5.15 billion, which would be 12% higher than last year at the midpoint. Likewise, it continues to expect that DCF will be between $2.9 billion and $3.3 billion, up 8% versus last year. That will enable the company to cover its high-yielding dividend with cash flow by a comfortable 1.7 times even as it aims to increase the payout 10% to 15% this year.

2019 is shaping up to be a good year

Williams is firing on all cylinders this year. The pipeline giant delivered strong operational results during the first quarter, fueled in large part by recently completed expansion projects. The company also continues to trim around the edges of its portfolio to further firm up its financial foundation. Those efforts position Williams to continue growing earnings and its dividend in the coming years, making it an ideal low-risk stock for income-seeking investors.