I recently covered Williams Companies' (NYSE:WMB) 11% earnings miss and explained why its recent acquisition of Access Midstream Partners (NYSE:ACMP), which it plans to merge with its own MLP, Williams Partners, (NYSE:WPZ), means income investors should keep Williams and Access on their radars.
In this article I'd like to turn to five important quotes from the company's most recent conference call, an often underutilized but very useful tool for getting to better know a company, to further examine the company's strengths and weaknesses.
Williams has big ambitions
"Our backlog of projects beyond 2017 just keeps building and you really should expect this to continue for some time as we bring the combined strength of both WPZ and ACMP now and bring those resources together and the opportunities that they combination brings really is going to be critical as the nation here tries to get up on a 100 Bcf natural gas market."-Alan Armstrong, President and CEO
The quote above references Williams' immense backlog of organic investment opportunities, both in progress and potential, which total $29 billion through 2019. This backlog is the key to Williams' continued strong dividend and distribution growth. Which brings me to the second quote.
Management is striving for dividend dominance
"We also rapidly accelerated our earlier stated plans of establishing WMB as a pure-play G&P hold-co and continue to lead the space and dividend growth by very wide margin."-Alan Armstrong
Management is striving for a 32% increase in Williams Companies' dividend in 2015 and 15% growth through 2017. The combined Williams Partners/Access Midstream Partners is expected to grow its dividend by 10%-12% through that same time period.
The key to accomplishing this goal, while still maintaining a strong coverage ratio of at least 1.1 to ensure distribution sustainability, is management's plan to drop down all of Williams Companies' midstream assets to its soon to be merged MLP, which will retain the Williams Partners name. This will provide the new Williams Partners with strong asset growth that will increase distributable cash flow (DCF) and help the MLP cover its distribution, which it hasn't been able to do for the last year.
It will also allow for sustainable distribution growth which will, through growing incentive distribution rights fees, allow Williams Companies to achieve enviable long-term dividend growth.
|Company/MLP||Projected 10 Year Annual Earnings Growth||Projected 10 Year Annual Dividend/Distribution Growth||Projected 10 Year Annual Total Return|
|Access Midstream Partners||17%||17.49%||21.39%|
Which brings me to an important quote regarding the nature of Williams' cash flows.
Cash flows growth is coming
"It also should be understood much of the big capital investments that we've been making here really over last two and half, three years, don't start producing cash flow until the third quarter and fourth quarter of the year as Gulfstar, Keathley Canyon and our OVM or Ohio Valley Midstream investment really began to generate significant cash flow and earnings here in the last half of the year."-Alan Armstrong
This is certainly great news for present owners of Williams Partners who have been rightly concerned about Williams Partners trailing twelve month coverage ratio of .95.
The MLPs inability to cover its distribution has been affected by two factors, management's raising the distribution even in the face of a DCF short fall (distribution raised 6.2% this quarter despite coverage ratio of .87) and an explosion at the company's Geismar, Lousiana Olefin plant in June of 2013.
Which brings me to my next quote, which shows management is learning its lesson regarding industrial safety -- an important factor for long-term investors to consider.
Geismar restart is postponed to improve safety systems
"Unfortunately...we did find a new concern there at Geismar that is going to require enhancement to our safety systems that we expect to cause about a six to eight week delay in the first sale at that point at Geismar."-Alan Armstrong
Though this will push back the Geismar restart to the first week in October, it does show that management is becoming more serious about increasing safety and minimizing industrial accidents. This is especially important given Williams' questionable safety record, which involves 14 accidents in the last 11 years.
An increased emphasis on safety will help the company avoid unexpected disasters, which will save money, lives, and minimize environmental damage in the long run. This is doubly true given the companies megagrowth ambitions (which can lead to cutting of corners to speed projects along and increased accidents), which include in the booming Marcellus and Utica shale plays.
Williams is betting big on the Marcellus
"The Marcellus area volumes continued their rapid growth as well with a 31% increase in gathered volumes as compared to last year's 2Q volumes and we are on track once again to lead the industry on volume growth in the Marcellus this year."-Alan Armstrong
One of the reasons Williams Companies bought out the remainder of Access Midstream was its exposure to the Marcellus and Utica shale plays. As seen in the charts above, the Utica shale has increased its production by ten-fold since 2012 while the Marcellus shale would now be the third largest gas producer in the world if it were a separate country. What's more impressive is that, according to analyst firm ICF International, production from the Marcellus/Utica shale will increase by 127% by 2035.
Williams Companies' latest conference call helps to shed light on the companies priorities and vision. As the quotes above illustrate, management is focused on expanding its midstream infrastructure as quickly as is safely possible and growing the distribution/dividends in a sustainable manner. This should give both current and prospective investors confidence about the company's and partnership's long-term prospects.
Adam Galas has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.