Williams Cos. (WMB 0.34%) and its master limited partnership, Williams Partners (NYSE: WPZ), transport about 30% of America's natural gas, the production of which has boomed in recent years thanks to the shale fracking revolution. While these two high-yield pipeline stocks have strong long-term growth prospects, investors should be aware of both the bullish and bearish case for every potential investment. Thus, I'd like to point out two short-to-medium-term risks that could send shares of Williams and its MLP crashing in the months and quarters ahead: falling natural gas and natural gas liquids prices, and the cancellation of some of its upcoming oil and gas projects.
Natural gas prices are in the toilet
Crashing oil prices might get all the headlines these days, but natural gas and natural gas liquid prices have also plummeted over the past year.
Henry Hub Natural Gas Spot Price data by YCharts.
The danger to Williams is that these crashing prices might result in gas producers paring back drilling and thus cause a short-term slowdown in production growth, which could decrease demand for some of the new projects for which Williams is attempting to obtain long-term contracts or force it to accept lower rates when existing contracts come up for renegotiation. Natural gas rig counts are already at historic lows and continuing to fall -- down 27% compared from a year ago. Rig counts in even the mighty Marcellus and Utica shales have declined by 11% and 20%, respectively.
Falling capital spending budgets mean that gas projects might get the ax
Crashing crude and natural gas prices are causing oil companies to pull back on non-oil investments such as liquefied natural gas export projects. In fact, Moody's believes that as many as 30 proposed LNG export projects could be canceled, which doesn't bode well for planned pipelines intended to service such facilities.
One such project is Oregon LNG which is still in the regulatory approval and planning stages and for which Williams is planning on building an 85 mile pipeline to help service the export terminal by connecting it to Williams' Northwest Pipeline in Woodlands, Washington.
Should falling energy prices cause this project to be cancelled than Williams might end up missing out on a potentially lucrative long-term contract to help supply decades worth of gas for export to Asia.
However, this pipeline isn't the only project at risk of cancellation due to low energy prices. As part of its $30 billion project backlog Williams has several projects that are still uncontracted and that might have to be removed if energy prices don't recover over the next few quarters.
Source: Williams Cos. investor presentation.
Low oil prices might kill the growth of Gulfstar
A key growth area for Williams is the Gulf of Mexico where it just launched a floating production and drilling platform capable of producing 60,000 barrels per day of oil called GulfStar One. Williams in negotiation with Mexican oil giant PEMEX for another such platform yet
Gulfstar One image courtesy of Williams Companies
low oil prices may result in this project and contracts for transporting the oil from the Gulf of Mexico, to fall through.
That's because there has been some troubling news recently that calls into question the economics of oil drilling in the Gulf of Mexico. BP just cancelled two Ultra Deep-Water or UDW rig contracts with offshore drillers Ensco, and SeaDrill Partners, both of which were operating in the Gulf. The fact that BP would rather pay $320 million in cancellation feesthan continue drilling is a potential warning that at today's oil prices Williams' oil service plans may not be feasible if PEMEX comes to the same conclusion.
I would definitely recommend that investors watch the size of the backlog in coming quarters to see if these "potential or under negotiation" projects are removed. If they are then it might indicate that Williams might have trouble continuing to grow its payouts as fast as it has in the past which could have a negative impact on the share price.
Bottom line: short-to-medium-term headwinds continue to grow
Don't get me wrong, in the long term I'm very bullish on Williams Cos. and Williams Partners, but I think current and prospective income investors need to be aware of what could go wrong here in the short-to-medium term. My goal isn't to keep you from investing at today's prices -- market timing is a largely fruitless endeavor -- but to help prepare you for a potential share price drop by understanding why it might happen.
