Last year was a brutal one for the energy sector. The COVID-19 outbreak caused energy prices to collapse, which provoked a wave of bankruptcies in the industry. On top of that, it was an active hurricane season in the Gulf of Mexico, which disrupted production.
However, despite these headwinds, natural gas pipeline giant Williams Companies (WMB +0.78%) delivered record results thanks to the resilience of its business model. As a result, it enters 2021 in excellent shape, putting its 7.2%-yielding dividend on an increasingly solid foundation.
Drilling down into Williams Companies' fourth-quarter results
|
Metric |
Q4 2020 |
Q4 2019 |
Year-Over-Year Change |
|---|---|---|---|
|
Adjusted EBITDA |
$1.336 billion |
$1.284 billion |
4% |
|
Distributable cash flow (DCF) |
$926 million |
$828 million |
11.8% |
|
Dividend coverage ratio |
1.91 times |
1.8 times |
6.1% |
|
Debt-to-EBITDA ratio |
4.35 times |
4.39 times |
(0.9%) |
Data source: Williams Companies.
Williams Companies' earnings and cash flow grew during the fourth quarter. That helped push its full-year adjusted EBITDA total to $5.12 billion and enabled it to generate $3.36 billion of DCF. Those results were record levels for the company; they were up nearly 2% from 2019's level and exceeded the midpoints of its pre-pandemic guidance levels for the year. Williams produced enough cash last year to cover its high-yielding dividend (which it increased 5.3% in 2020) by 1.73 times while ending the year with a lower leverage ratio.
Fueling Williams' strong end to a turbulent year was the strength of its northeast gathering and processing (G&P) business unit:
Data source: Williams Companies. Chart by the author.
Earnings from Williams' transmission and Gulf of Mexico business edged slightly higher (0.2%) during the fourth quarter, while declining 1.4% for the full year. The company benefited from lower operating and administrative costs and recently completed expansion projects on its Transco system. These factors helped offset the impact of hurricane-related shut-ins, which weighed on its full-year results.
Northeast G&P earnings rose 7.7% during the fourth quarter and jumped 14.5% for the full year. The company benefited from lower operating and maintenance costs, higher volumes, and an additional ownership interest in Utica East Ohio Midstream.
Finally, earnings from its operations in the West increased by 5.3% during the fourth quarter, though they declined 7% for the year. These assets benefited from higher revenues and rates, as well as reduced operating costs during the fourth quarter. However, the expiration of a minimum volume contract in the Barnett Shale impacted full-year earnings.
Overall, Williams Companies gathered a record amount of natural gas at 13.2 billion cubic feet per day (Bcf/d). The company also benefited from record transmission contracted capacity of 22.2 Bcf/d.
Image source: Getty Images.
What's ahead for Williams Companies
Williams Companies expects to generate between $5.05 billion to $5.35 billion of adjusted EBITDA this year, a 1.9% increase at the midpoint. Meanwhile, it expects to produce between $3.55 billion to $3.85 billion of available funds from operations (AFFO), a 1.7% increase from last year at the midpoint. That's enough cash to cover Williams' dividend -- which it recently increased by another 2.5% -- by 1.85 times for the full year.
The natural gas pipeline giant also expects to invest $1 billion to $1.2 billion on expanding its infrastructure systems and another $400 million to $500 million on maintenance projects. It expects to finance this entire investment with excess cash after paying its dividend. It should have room to spare, which has lead Williams to forecast that its debt-to-adjusted-EBITDA ratio will improve to about 4.25 times this year.
The company believes it has lots of growth still ahead. It's currently executing $2 billion of projects to expand its gas transmission business, which should enter service by the end of 2023. Meanwhile, oil companies are developing several new projects in the Gulf of Mexico that should enter service through early 2025 and tie into Williams' existing systems in the region. On top of that, it has 26 additional gas transmission expansion projects in the development pipeline, representing $12 billion of investment potential that it can capture through 2031. The company is seeking ways to leverage its existing pipeline transportation and storage systems to integrate solar, renewable natural gas, hydrogen, and other opportunities to benefit from the transition to cleaner fuel sources.
A solid option for yield seekers
Williams Companies proved its business model's durability last year by delivering record results despite all the market turbulence. That sets it up for continued success in 2021 and beyond.
Its focus on cleaner-burning natural gas should give it fuel to keep growing for years to come. Further, it should be able to leverage its existing infrastructure to capture new sources of growth as the economy switches to even cleaner alternative fuel sources. Its 7.2% yielding dividend looks like a solid option for investors seeking a compelling yield with upside potential.
