Please ensure Javascript is enabled for purposes of website accessibility

Williams Companies Inc. Tightens Its Belt

By Matthew DiLallo – Jan 25, 2016 at 12:33PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

With its operating environment getting a lot tougher, Williams and Williams Partners adjust.

Williams Companies (WMB 0.21%) and its master limited partnership, Williams Partners (NYSE: WPZ) , announced today that they are reducing their 2016 growth capital plan by $1 billion, or roughly a third less than previously planned. That reduction is coming as a result of project deferrals, delays, and cancellations due to the currently weak commodity price environment as well as sharply higher cost of capital. It's a much-needed belt tightening from the midstream franchise given that it couldn't afford the alternative.

Details on the plan
Williams Companies and Williams Partners plan to spend about $2.1 billion on growth capital in 2016, with roughly $2 billion of that spending at the Williams Partners' level. Of that amount, $1.3 billion will be invested in Transco expansions or other interstate pipelines growth projects. The rest of the spending, or $700 million, will be invested primarily in gathering and processing systems. However, the companies made it clear that these gathering and processing expansions are being made to support known producer volumes such as wells that have already been drilled and are awaiting connecting infrastructure.

To support the spending plan, Williams' Transco subsidiary was able to raise $1 billion in senior notes to fund the bulk of its share of this capex. In addition to that, Williams Partners plans to fund the rest of its investments via asset sales, with plans to sell in excess of $1 billion in assets through the first half of the year. This will enable it to fund the entirety of its capex plan without issuing any public equity or debt in 2016, which should support its investment-grade credit rating.

What this means for Williams going forward
The revised 2016 capex plan will do a few things for Williams Partners. First and foremost, it will enable it to largely self-fund its capex without having to worry about accessing the fickle capital markets, which have been largely closed off to energy-related companies in recent months. Because it can self-fund this plan via asset sales and a subsidiary-level debt issuance, Williams Partners expects to be able to maintain its current distribution rate of $0.85 per unit. That alleviates a big worry for investors that it would need to reduce or suspend its distribution in order to use that cash to fund its growth investments. It is also worth noting that the investments it's funding are backed by firm contracts or production, meaning they'll deliver cash flow growth immediately after coming on line, which should support Williams Partners' ability to grow its distribution once the capital markets reopen.

This revised plan is also important for Williams Companies because the bulk of its income is derived from the distributions it receives from Williams Partners. It uses its income to support its own debt as well as its capex program and the dividend it pays to shareholders, which now also appears to be on solid ground. In solidifying this key income stream, Williams Companies has bolstered its case for completing its pending merger to Energy Transfer Equity without having to alter the deal terms. That should help ease the market's concerns that the merger might fall apart.

Investor takeaway
Normally, a big cut in growth capex would be bad news because it reduces future distribution growth potential. However, these are not normal times, and in this case, it's a sorely needed reduction because Williams Partners likely wouldn't be able to fund that spending without cutting its distribution, which would lead to reduced income at its parent, Williams Companies. In other words, this belt tightening not only supports future cash flow growth but it solidifies current income, which is critical given current market conditions and Williams' pending merger. 

Matt DiLallo has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Williams Companies Stock Quote
Williams Companies
WMB
$33.90 (0.21%) $0.07

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
356%
 
S&P 500 Returns
118%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 11/27/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.