The third quarter was a rough one for anything energy-related, with few companies being spared from the renewed weakness in the oil price. Having said that, while nearly all are affected, some are handling it much better than others. Williams Companies (NYSE:WMB) and its MLP Williams Partners (NYSE:WPZ) are among that later group. That was clear after taking a closer look at the companies' recent third-quarter reports.
1. Not immune, but not sick either
Williams Companies reported adjusted EBITDA of $1.1 billion for the third quarter, which was $195 million, or 21% higher, than the year-ago quarter. That growth was driven primarily by its ownership interest in Williams Partners, which boosted its own adjusted EBITDA by $193 million, or 21%. New projects were the primary driver of Williams Partners' growth.
Williams Partners' growth, however, would have been even higher if it wasn't for a $68 million hit from lower NGL margins after NGL prices fell to a 10-year low. That impact shows the company clearly isn't immune to the weakness in commodity prices, though the impact of those prices is still relatively minor.
2. Fees save the day
The primary reason commodity prices have such a minor impact is because 90% of Williams Partners' gross margin is derived from fee-based infrastructure. Those fees deliver strong recurring cash flow no matter what commodity prices are doing, which really helps to insulate both companies when prices are weak.
3. New projects drive growth
As mentioned, new projects at Williams Partners were the primary driver of increased income at both companies. One of those key projects was the recently expanded Geismar plant, which provided a $58 million benefit during the quarter. In addition to that, the Keathley Canyon Corridor project provided a $52 million boost of its own.
Williams remains focused on driving new growth via fee-based projects because of the income security that fees provide. CEO Alan Armstrong noted in the press release:
In September, we completed Transco's Virginia Southside Expansion and we're on track to place into full service the Leidy Southeast Expansion by the end of the year, helping relieve supply bottlenecks in the Northeast and creating more fee-based revenue ... We recognize the fundamental pressures impacting our direct commodity margins and volume growth on our gathering and processing systems. However, our unique position and backlog of fully contracted, demand-driven projects will drive our continued operating cash flow growth.
Armstrong points out two items of importance. First, Williams has a number of fee-based projects that were recently completed, and therefore should provide a boost to its near-term results. Further, he points out that the company is aware of the impact that commodity prices have on its business, which is why it's focused on driving future growth not only from fully contracted fee-based assets, but from demand-driven projects, which are those that actually benefit from weaker commodity prices.
There are three takeaways Williams made clear in its third-quarter report. First, it is being affected by weak commodity prices, especially with NGL prices at a 10-year low. However, the fact that 90% of its gross margin is fee-based really provided solid support during these trying times. Finally, the company is focused on building additional fee-based, demand-driven projects to fuel growth because these assets really help offset the impact from weaker commodity prices.