Recently I wrote about why Williams Companies (WMB -0.58%) and its affiliated MLPs, Williams Partners LP (NYSE: WPZ), and Access Midstream Partners LP (NYSE: ACMP), might make strong income investments over the next few years. I also explained why the companies' recent conference call should give long-term investors confidence in Williams. However, in recent months the stock market has seen fit to drive the prices of these companies down 6%-7% off recent highs, and investors might be wondering what this might mean for their holdings.
Here at The Motley Fool, we know that buying great companies for the long term is the best way for regular investors to build long-term wealth. So let's look at why the recent price drops are nothing more than a buying opportunity for patient investors.
Long-term energy megatrend remains in place
According to America's largest pipeline operator, Kinder Morgan, America's demand for natural gas is set to soar 36% over the next decade, fueled by a switch to natural gas-fueled power plants and liquefied natural gas exports.
Source: Kinder Morgan June 12, 2014, investor presentation.
Providing the supply for this demand will be increased gas production from the hyper-prolific Marcellus and Utica shale formations, which have seen production explode 15-fold and 10-fold in just the past seven and two years, respectively.
Source: EIA July Drilling Productivity Report.
As impressive as the gas production from these two formations has been -- the Marcellus shale, if it were its own country, would be the third largest gas producer on Earth -- they are expected to increase production by an additional 112% by 2024.
To make this gas production possible, the Inga Foundation estimates that $114 billion will need to be spent on gas midstream infrastructure (gathering, transport pipelines, and processing facilities) in just the next five years, and $640 billion on oil and gas infrastructure through 2035.
This represents an enormous opportunity for Williams Companies and its MLPs, an opportunity that is well summed up with this quote from the company's president and CEO, Alan Armstrong.
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 their combination brings.
Speaking of the company's backlog, the combined Access Midstream and Williams Partners, which management plants to merge into a bigger, faster-growing Williams Partners by year's end, has one of the most impressive growth plans I've ever seen.
Source: Williams Partners/Companies Second-Quarter Earnings Presentation.
With a total backlog of $29 billion through 2019, Williams Companies and Williams Partners are well situated to take advantage of the coming midstream gas boom, which brings me to my next two reasons for long-term optimism.
Merger represents immense opportunity, and it might not be the last one
Williams Companies' recent $6 billion buyout of Access Midstream's remaining general partner rights signals a major shift for Williams. The plan is for Williams Companies, which serves as general partner to Williams Partners and Access Midstream, to become a pure-play general partner by dropping down all its midstream assets to the new Williams Partners.
Thus this acquisition, along with Williams' enormous backlog of growth projects, should help Williams Partners achieve exceptional growth in the years to come. However, the Access Midstream acquisition may not be the last Williams makes.
Richard Kinder, founder and CEO of Kinder Morgan, recently explained that one of the reasons for the historical Kinder Morgan merger was to streamline Kinder Morgan, so its shares could be used to "pursue expansion and acquisitions in a target-rich environment."
Just how "target rich" are we talking? Well, there are about 120 MLPs with a combined enterprise value (which represents how much it costs to acquire them) of $875 billion. Combined with the $640 billion in midstream investment coming over the next 20 years, this represents more than $1.5 trillion in total growth opportunities in the MLP industry. When put in that perspective, Williams Companies' $6 billion acquisition is just a drop in the bucket, and the company is faced with a long growth runway indeed.
This bodes well for Williams Partners' long-term distribution growth, and a soaring distribution, in turn, will mean fast-growing incentive distribution rights fees, which will fuel Williams Companies' own dividend. This brings me to the third reason for investors to own Williams.
Strong dividend and distribution growth ahead
In the most recent quarter's conference call, Armstrong expressed pride and confidence in his company's ability to "lead the space and dividend growth by very wide margin."
To continue in that role, management plans on raising Williams Companies' dividend by 32% in 2015 (assuming the merger is approved) and an additional 15% annually through 2017. Meanwhile Williams, Partners is expected to grow its distribution by 10%-12% through that same time period.
When combined with Williams Companies' and Williams Partners' yields of 4% and 6.8%, respectively, these dividend and distribution growth rates increase the chance of continuing Williams' long-term track record of market-crushing total returns (Williams Partners has returned 12.6% annually over the past 11 years, more than double the market's 6.6% total return.)
Takeaway
Williams Companies has a long track record of strong dividend and distribution growth, and the combination of a decades-long midstream gas infrastructure megaboom, an enormous project backlog, and a vast sea of potential acquisition targets means that this is likely to continue to many years to come. This makes Williams Companies and Williams Partners strong income choices for long-term investors hoping to prosper from America's historic energy bonanza.
