Williams Companies' (NYSE:WMB) strategic plan has started paying off. That was evident in the second quarter as its earnings and cash flow soared despite the recent sale of several assets to bolster its balance sheet.
The pipeline giant expects its growth trend to continue in the coming years, which was a key theme running through its second-quarter conference call. Here are three factors fueling that optimistic view.
1. Northeast G&P should accelerate in 2021
CEO Alan Armstrong noted on the call that weaker natural gas prices were negatively affecting the capital spending plans of natural gas drillers in the Northeast. Because of that, the company expects its growth rate in the region to slow. For 2019 Armstrong said that "we are currently forecasting gathering volume growth of about 13%, which should result in adjusted EBITDA growth of 19% for a total of about $1.3 billion." He then said that "looking forward, our 2020 very latest forecast shows about a 5.5% gathering volume growth over 2019, generating about 11% adjusted EBITDA growth to get to about $1.45 billion."
Overall, the company expects solid volume growth in that region through the end of next year, though not quite as fast as it initially anticipated due to weaker gas prices this year. It is, however, optimistic that conditions will strengthen in the future. Armstrong stated, "Beyond 2020, we do see an opportunity for a stronger growth rate to resume in 2021, but that of course will be dependent on a better balance in the natural gas market." Driving that view is that "the natural gas demand growth outlook remains very strong, driven by LNG export growth, continued power generation and major industrial investments that continue to come online, trying to take advantage of low-cost US natural gas and US low-cost NGL prices."
2. Transco should continue growing
One of Williams' biggest growth drivers in recent years has been its Transco pipeline system, which moves natural gas up and down the eastern seaboard. The company recently completed several expansion projects on that system and has many more in various stages of development. Armstrong ran through the company's progress on the call by stating:
We recently applied for a FERC certificate for our Leidy South project. ... [This is an] expansion of Williams' existing Pennsylvania infrastructure that will further connect Appalachian gas with growing demand centers along the Atlantic Seaboard in time for the 2021/2022 heating season, ... Also our FERC certificate for Southeastern Trail project is pending approval. ... [This] system [is] designed to provide additional pipeline capacity to serve growing markets in the mid-Atlantic and Southeastern states by November of 2020. ... Our most recently announced Transco project, Regional Energy Access, concluded its open season and our team is finalizing negotiations with this customer base. So all in all, continued tremendous amount of activity on Transco, both in terms of completing existing projects that we've got underway like Hillabee Phase 2, which is also ahead of schedule, and a long list of projects that we have in the permitting phase.
As Armstrong pointed out, Williams continues to expand this key pipeline system. As these projects come online, they'll supply the company with a growing stream of steady cash flow backed by long-term, fee-based contracts.
3. Deepwater is starting to grow again
The third leg of Williams' growth stool is the deepwater Gulf of Mexico. That region hasn't been much of a factor for the company in recent years. However, Armstrong stated that "we're seeing a pickup in activity and significant new discoveries in and around our assets that has us positioned for significant free cash flow growth for years to come." That growth should start showing up in the third quarter of this year since the company recently bought the Norphlet gathering system online. Gas will flow from that system into the Norphlet pipeline, which it just acquired. From there it will go into the recently expanded Mobile Bay processing facility and then on to the Transco system.
Beyond that near-term growth, Armstrong said, "We continue to see opportunities for significant incremental cash flow in the 2022-2023 timeframe from our deepwater operations. And we are really excited about the very substantial growth that we're seeing both on acreage that's already dedicated to us and as well new acreage that we're very confident that we're going to be able to pick up given our expansive network." Driving that optimism is that the industry recently made several discoveries near Williams' existing assets. That leads it to believe it will capture those volumes as producers bring new projects online in the coming years.
Lots of growth still up ahead
Williams Companies expects 2019 to be a big year, with earnings on track to surge 12% due to recently completed expansion projects. While the company does anticipate that its growth rate will slow starting in 2020 to 5%-7% per year, it has plenty of fuel to keep expanding in the coming years. That should enable it to consistently increase its already well-above-average 6.6%-yielding dividend. Williams' combination of growth and income make it a perfect stock for income-focused investors like retirees.