Chevron (CVX 0.75%) and natural gas pipeline giant Williams (WMB -0.27%) recently signed agreements to support key development projects. The deals will provide Chevron with access to pipeline capacity to transport its natural gas from production wells to market centers. Meanwhile, the contracts will supply Williams with more cash flow to support its 5.7%-yielding dividend.
Here's a look at how the agreements will benefit both energy stocks.
Getting a leg up on the competition
Williams will provide natural gas gathering services to Chevron in the Haynesville basin of Louisiana. The energy behemoth dedicated its 26,000-acre position to Williams, which will build a new gathering system to transport the gas from the wellhead to Williams' Louisiana Energy Gateway (LEG) project. The gas can then move to premium markets via Williams' Transco pipeline. It can also flow on other systems to industrial markets and liquefied natural gas (LNG) facilities along the Gulf Coast.
Williams expects the LEG pipeline to start service next year. It's a key aspect of the company's lower carbon, wellhead-to-water strategy. The company made a final investment decision to move forward with that project last June. A key catalyst was acquiring Trace Midstream last year. Trace's customer, Rockcliff Energy, signed a long-term capacity commitment for the LEG project. Chevron will now join Rockcliff and other shippers on the LEG system.
In addition, Williams has also agreed to use its existing infrastructure in the Gulf of Mexico to serve increased production at Chevron's Blind Faith platform. Chevron and its partner TotalEnergies (TTE -1.28%) are developing the Ballymore tieback project to the Blind Faith platform. Using existing connections, Williams will provide offshore natural gas gathering, crude oil transportation services, and onshore natural gas processing services for this production.
A win-win-win partnership
The agreements are a "great example of Williams and Chevron working together to accelerate the development and delivery of natural gas to supply affordable, reliable, ever cleaner energy both here in the United States and overseas," stated Williams' CEO Alan Armstrong in the press release announcing the deal. They'll enable Chevron to advance its development plans in the Haynesville basin and the Gulf of Mexico. The agreements support the company's strategy of growing its production and margins since they provide Chevron access to premium markets where it can get the most value for its gas.
Meanwhile, the contracts will supply Williams with incremental cash flow for a minimal investment. It will need to invest some money to build a gathering system in the Haynesville basin to support Chevron's development plans. However, the company has already approved LEG and will utilize existing infrastructure in the Gulf of Mexico. As such, the deals will enhance those assets' returns and cash flow profiles. That will provide Williams with more cash flow that it could use to continue growing its dividend. The pipeline company recently increased its dividend by 5.3% and has steadily grown its payout over the last several years.
Finally, the agreements are a win for the environment. Williams is incorporating emerging technologies to deliver lower emissions gas, which it's offering on LEG. The company also believes the pipeline system can incorporate carbon capture and storage to further decarbonize the gas produced in the Haynesville basin. This aspect also aligns with Chevron's lower carbon strategy.
More fuel to grow the dividend
Chevron's agreements with Williams will benefit both companies. It will enable Chevron to continue growing its production, which should allow it to produce more cash that it can return to shareholders via its dividend and repurchase plan. They'll also supply Williams with more money that it can use to keep growing its dividend. That makes its already high-yielding payout even more attractive for income-seeking investors.
