Williams Companies (WMB 0.14%) and its recently merged MLP, Williams Partners (NYSE: WPZ), reported a great quarter last month, but with revised guidance that indicated that the recent collapse of energy prices may be weighing on their growth prospects. Let's examine four key quotes from Williams' earnings conference call -- an invaluable but often underutilized investment tool -- to see how the energy price crash may affect payout growth going forward, and what that means for long-term income investors.
Management is being conservative with long-term energy price forecasts
First on the commodity price deck, our new price deck is centered on a $55 WTI and $3 Henry Hub gas price [...] We believe this is certainly one of the most conservative decks being used among our peers in the industry, and overall this resulted in a 44% reduction in our planned commodity margins and commodity positions at WPZ. -- Alan Armstrong, President and CEO
Management has revised its growth projections and investment plans based on the expectation that oil prices will average $55, $65, and $70 per barrel in 2015, 2016, and 2017, respectively.
Natural gas prices, which are more applicable to its core businesses of transporting, processing, and storing natural gas and natural gas liquids or NGLs, are projected to average $3, $3.25, and $3.75 per thousand cubic feet in 2015, 2016, and 2017, respectively.
NGLs such as ethane have been a drag on Williams Partners in recent years as the massive growth in U.S. natural gas production has resulted in a massive glut of supply. While the petrochemical industry is investing heavily into using this cheap feedstock, it may be a few years before NGL prices recover, as the infrastructure required to make use of NGLs needs to be built out.
Falling rig count doesn't matter all that much
Only about 12% of our gross margin is now exposed directly to the commodities. On the gathering volumes side, we've assumed reduced activity on the assets with unprotected volume exposure [...] In other words; we're trying to get ahead of the lowering of rig counts. -- Alan Armstrong
Since so much of Williams' business comes from gathering, processing, and transporting natural gas, how many natural gas drilling rigs are operating is important to watch. According to Baker Hughes, as of February 27, 280 rigs were drilling natural gas wells in the United States, down 83% from the peak of 1,606 reached on September 12, 2008.
However, while true that the natural gas rig count is now at historically low levels, this doesn't necessarily bode poorly for Williams. That's because gas production, especially out of the Utica and Marcellus shales, has exploded in recent years, as productivity per rig -- courtesy of more advanced fracking techniques -- has increased gas production per rig by as much as 25 times.
Revised guidance is due to sandbagging
With many of the potential upsides that have been taken out of our guidance now, we still see a lot of those upsides out there, but we pulled a lot of that out of our guidance, and so as those occur, they will result in upsides to our guidance. --Alan Armstrong
Aggressive investment program is proceeding as planned
Despite the significant de-risking, WPZ still has one of the highest distribution growths among our peers, and this is driven now by approximately $4.5 billion of adjusted EBITDA in 2015 which is further driven by fee-based revenues which make up about 88% of our gross margin. And then, we expect our EBITDA to continue to grow to about $6 billion on the backs of over $9 billion of fee based projects as we look forward to 2017. -- Alan Armstrong
With a 33% increase in adjusted EBITDA, or earnings before interest, taxes, depreciation, and amortization, likely over the next three years, I'm confident that Williams Partners should be able to sustainably grow its distribution -- it's just a matter of how fast -- which should also mean strong growth in payments to Williams Companies, its general partner. That should mean strong earnings and dividend growth for Williams Companies in the years ahead.
Investor Takeaway
With 88% of its gross margins protected by long-term, fee based contracts, and 99% of future investment going to similar projects, Williams Companies and Williams Partners shouldn't have any problem preserving consistent and predictable cash flows to continue paying their generous yields of 4.9% and 6.7%, respectively.
In addition, with $9 billion in new investments in fee-based projects coming in the next three years, I think it's highly likely that long-term income investors will do well owning both Williams Companies and Williams Partners in the years to come. Even if the payout growth rate falls short of earlier predictions, the combination of generous present yield and moderate dividend and distribution growth is, in my opinion, likely to generate long-term, market-beating total returns.
