Recently I've written about Williams Companies' (WMB 2.48%) positive long-term attributes as well as reasons the share/unit price of Williams and its MLP Williams Partners (NYSE: WPZ) could crash. After studying the company's recent earnings release, as well as its conference call, there are five quotes I think highlight the reasons long-term income investors should consider investing in Williams and its MLP.
Earnings miss was a bump in a long road to growth
"We're coming off a quarter here that was in-line with our expectations, but much lower at WPZ due to Geismar's extended outage and a continued heavy capital investing period all as was expected." --Alan Armstrong, President and CEO
This quote is in reference to Williams Partners missing its earnings estimate by a seemingly horrific 82% as earnings per share declined by an even worse 86.5% compared to last year's third quarter.
As Armstrong explained the delayed restart of the expanded Geismar facility was a major cause of the miss, negatively affecting distributable cash flows by $200 million this quarter.
In addition, Williams has been heavily investing in one of the largest growth backlogs in the industry, one made only larger by its recent $6 billion acquisition of the remainder of Access Midstream Partners (NYSE: ACMP).
Source: Williams Companies investor presentation
New projects coming online that will grow cash flows
"A major change is afoot as we combine both WPZ and Access into the large scale natural gas infrastructure MLP. And the team here at WPZ is very energized right now as we're on the verge of a major $1 billion boost in our annual cash flows that we expect to come from three major projects Geismar, Gulfstar and the Keathley Canyon Connector all of which have reached the commissioning stage here in the fourth quarter." --Alan Armstrong
With the added cash flows from these three projects, Williams Companies and Williams Partners (into which Access Midstream Partners will be merged during the first quarter) are expected to become dividend/distribution growth power houses in the midstream MLP industry. However, more importantly than just a fast payout growth rate, is the safety and sustainability of those dividends/distributions.
Fast growing and sustainable payout to reward long-term investors
"The major changes that will be occurring within the new merged partnership are exciting in many ways. First, we will have the highest forecast distribution growth rate of any of the major MLPs. Second, our coverage will be above average for the same peer group with expected $1.1 billion of excess cash flow coverage through 2017 and the Access cash flows, along with our major new fee based projects continue to dramatically reduce exposure to commodity prices." --Alan Armstrong
This quote is important for two reasons. First, Williams Companies feels confident enough about its financial position to announce a 32% increase in its dividend and reiterated guidance of 15% annual dividend growth through 2017. For Williams Partners it's guiding for 10%-12% annual distribution growth through 2017. That compares well to its peers, especially given the generous yields of 4% and 7.2% for Williams Companies and Williams Partners, respectively.
Second, it emphasizes that Williams Companies is focused on reducing its commodity risk through long-term, fee-based contracts. Given the recent plunge in energy prices, this should alleviate investor's fears that declining natural gas prices might lead to the company/MLP missing its payout growth guidance, or worse having to cut the payout in the future.
Henry Hub Natural Gas Spot Price data by YCharts
Strong investment in Marcellus/Utica shale to be key growth catalysts
"These new prospective projects include the Appalachian Connector and the Diamond East projects, both are major new projects that connect the burgeoning supplies from the Marcellus and Utica directly to growing demand on Transco that is anxious to see the supplies coming their way as those markets strive to grow as well." --Alan Armstrong
One of the key reasons Williams bought Access Midstream was for its great exposure to most of America's most prolific shale formations, such as the Marcellus and Utica shale.
Source: EIA July production update
As these images show the growth from these formations has been truly stunning, with the Marcellus and Utica shale increasing production by a staggering fifteenfold and tenfold in the last seven and two years, respectively.
What's more, according to analyst firm Wood Mackenzie, these shale formations are expected to increase production an additional 112% over the next decade.
That will make the Marcellus and Utica shales one of the most important areas for Williams to expand its pipeline system into. This kind of growth in America's gas production is why it's estimated that $640 billion in midstream investment that will be required over the next 20 years, making Williams current $30 billion total backlog just a drop in a very large growth bucket.
Williams is diversifying into new growth areas
"The strong and undeniable fundamentals of low-cost clean energy and the cheapest petrochemical feed-stocks in the world will prevail we believe and we're seeing the demand pool beginning to grow. We have continued to position ourselves in a way that will catch this very sustainable and fundamentally supported wave of volume growth and at the same time, help our customer base achieve their lofty goals of growth as well." --Alan Armstrong
This quote is in reference to Williams' long-suffering NGL (natural gas liquids) business which has faced declining margins due to plummeting ethane prices. That in turn is a result of massive growth in natural gas production and insufficient pipeline capacity for transporting this valuable petrochemical feedstock. However, long-term NGLs represent a major growth opportunity for Williams in two ways.
First, according to Enterprise Products Partners (EPD 1.41%), export demand for NGLs will grow by 79% by 2020.
Second, the petrochemical industry is investing $125 billion into building or expanding 148 facilities, mainly on the Gulf Coast, to take advantage of cheap NGLs. It's estimated that $56 billion in midstream infrastructure will be needed to service this fast growing industry.
Bottom line
Williams Companies and Williams Partners represent one of the best dividend/distribution growth opportunities long-term income investors have to cash in on America's historic energy boom. These five quotes highlight a management team with ambitious plans to not only grow but also richly reward investors with some of the highest sustainable payout growth rates in the midstream MLP industry.
