Williams Companies' (NYSE:WMB) business model has proved to be very resilient during the current oil market downturn. The pipeline company's focus on linking natural gas production basins to demand centers experienced minimal disruption during the first quarter, enabling it to generate solid results. While it does see some headwinds ahead in a few of its oil-linked regions, the overall stability of its cash flow profile should enable it to maintain its high-yielding dividend. 

A look at Williams Companies first-quarter earnings

Metric

Q1 2020

Q1 2019

Change

Adjusted EBITDA

$1.262 billion

$1.216 billion

3.8%

Distributable cash flow

$861 million

$780 million

10.4%

Dividend coverage ratio

1.78 times

1.70 times

4.7%

Data source: Williams Companies.

Williams Companies delivered solid earnings and cash flow growth during the first quarter, supported in part by its contract profile. Overall, the company noted that 42% of its EBITDA comes from firm reserved capacity agreements, meaning its customers pay it even if they don't use space in its pipelines.

Those contracts, when combined with the positive impact from recent expansion projects, fueled healthy growth in two of its three business segments:

Williams Companies earnings by segment in the first quarter of 2020 and 2019

Data source: Williams Companies. Chart by the author.

Earnings from the company's transmission and Gulf of Mexico segment rose 5% year over year. The main driver was its Transco system, which benefited from recently finished expansion projects and increased rates. That more than offset lower revenue from its Gulfstar system.

The Northeast G&P segment delivered a more than 22% earnings increase. Fueling that growth was higher gathering, processing, and liquids handling volumes on several of its systems as well as an increase in its ownership of Utica East Ohio Midstream.  

The lone laggard was its west segment, where earnings declined by 20%. That's due in part to lower revenue in the Barnett Shale, where some minimum volume contracts expired, and weaker commodity margins as a result of lower natural gas liquids prices.

Parts of a pipeline system with the sun setting in the background

Image source: Getty Images.

A look at Williams Companies' outlook

While Williams' business model largely insulates it from near-term volatility in commodity prices, this year's downturn will have some effect on its operations. Most of its oil-focused customers have reduced their activity levels and shut-in wells that aren't economical at lower prices. Because of that, the company expects to gather fewer associated gas volumes in the west. As a result, it anticipates that its adjusted EBITDA will now come in toward the lower end of its $4.95 billion to $5.25 billion guidance range. There is some variability to this outlook as higher gas prices could drive gas-focused drillers in the northeast to increase their volumes, while lower oil prices could cause additional production shut-ins out west.

With its customers producing less oil and gas this year, they don't need some of the additional infrastructure capacity Williams had planned to build. Because of that, the company now sees growth-related spending trending toward the lower end of its $1.1 billion to $1.3 billion guidance range.

Despite this reduced outlook, Williams expects to generate enough cash to cover its dividend by around 1.7 times. That will allow it to produce more than $1 billion in excess cash, which should finance most of its growth-related spending. This investment level would keep its leverage to around 4.4 times debt-to-EBITDA this year, which is an improvement from nearly 4.8 times in last year's first quarter and only slightly above its long-term target of 4.2 times.

The big-time dividend is on solid ground

While Williams Companies isn't entirely immune to the impacts of the oil market downturn, its gas infrastructure-focused business model provides lots of insulation. Because of that, the company remains on track to deliver earnings and cash flow within its initial guidance ranges. That will give it enough money to keep paying its high-yielding dividend as well as continuing to expand its gas-focused pipeline network.