The Williams Companies, Inc. (WMB) Earnings Call Transcript & Summary

All right. Morning again. Following up now, we've got Alan Armstrong from Williams, CEO. So please join me in welcoming Alan. The floor is yours, sir.

Wow, that was quite a lengthy intro there, Spiro. Good morning, everyone, and glad to have you here. I was having a hard time getting into the meeting, fighting through the crowds getting in here. But I appreciate you all being here. And we've got a lot of really good story to tell, and the business continues to run very well. And so we're really excited to continue to talk about what we think is a really good strategic setup for continued natural gas demand, even though we're certainly in some blips, and pricing in a way that's putting a lot of pressure on producers that at the end of the day, the low natural gas prices are continuing to drive demand. So we'll talk a little bit about that today. And we'll talk about some of the specific projects that are continuing to drive our growth for Williams. So just getting into it, we have really been very determined and very focused on our strategy. We think it continues to be a winning strategy in terms of natural gas being both the low-cost fuel as well as the clean fuel both here domestically and around the world. And we think that's really starting to find its way. I think the good news is, I was in D.C. yesterday, and it's evident to me that there's starting to be a move towards the middle, towards a more rational approach to emissions reductions. And I think natural gas is going to have to be -- whether people like it or not, it's going to have to be front and center as a solution for both emissions reductions and continue to being able to grow the economy. So I'm really encouraged about what I'm hearing politically starting to form in the middle. So you saw Kevin McCarthy starting to pull together a Republican caucus around climate change, greenhouse gas emissions. I think it's a huge step forward. And yesterday, I presented the National Petroleum Council study, which recommends that Congress take on a national policy for greenhouse gas emissions and, at the same time, reform NEPA, which is the permitting process today for big federal infrastructure projects. And so I'm really actually kind of encouraged that we're starting to see some progress towards -- people call it a move to the middle. And I would tell you, I call it a path forward as we think about how we continue to keep our economy growing and take on challenges around climate change. Around -- down the middle, in terms of the way the team is operating and Williams' operating, I couldn't be prouder of the efforts of our teams, our operational excellence. We measure our operating margin ratio in our business. We continue to improve on that. I think this is the fifth year in a row now that we've driven our operating margin ratio higher. We measure that internally, and we measure it against our peers. And we think within our space, we're one -- amongst the very best on that. On the capital project success, we continue to deliver on projects. Last year, our capital budget came in about below midpoint, about $400 million lower than our original midpoint. A lot of that was from savings on projects. So we continue to execute on projects both ahead of schedule and on time, and we continue on the strategic transactions. We did some great transactions last year and liquidated several investments, the lowest of which was a 14 multiple for our G&P assets. And so we continue to be encouraged about the ability to liquidate our business. And a lot -- we had a lot of questions on that about why we're able to get those higher margins. And I can tell you, it's because of the way we -- sorry, getting those higher multiples, and I can tell you that's because of the way we contract our business in a long-term sustainable way that has escalators in it and very strong contractual rights in our business as well as the scale of our businesses, which have steady, predictable cash flows behind them and not -- are not exposed to commodity price and commodity margins. The -- so those transactions really add a lot of value. I'll show you a slide on that about what that accomplished for us. Last year, we sold about $1.1 billion in asset sales that was not part of our original plan and guidance. But despite those -- raising that much cash, we still overachieved on our financial targets last year, even though those asset sales weren't contemplated. And on the stability side, now we're down to 2% of our gross margin is now coming from direct commodity margin. And so we have continued on that march. And you'll see today how remarkably resilient and steady our cash flows are and how predictable they've been up against a variety of conditions. And so I'm excited to show that to you. And as well, we continue on the dividend coverage this year. We've got about $1.3 billion. Probably one of the very few in the space this year that can say after capital growth, after dividends, we still have excess cash available, so true free cash flow growth over and above our capital -- our growth capital investments, and so we'll talk about that. So just a real quick picture here of our business. And you can see one of the things that's most important about is the wide variety of basins that we deliver, and we're very fortunate to have pipelines that are serving some of the highest growth areas in the nation. And so that growth continues, and I'll show you some pictures of that. Here's how we did here in '19. And as you can see, again, and this is third year in a row of this, but continuing to be on the upper end of our guidance ranges. And so we're really excited about that. We also saw record volume growth last year in our gathered business as well as contracted transmission capacity. So when we talk about contracted transmission capacity, we're talking about what is fully sold out on a firm basis on our pipeline. So it's not us speculating, and it's not short-term volumes. These are long-term firm contracted growth, and that's what we measure within our pipelines because our pipelines are virtually completely sold out. So people think that we make a lot of money when we have a cold winter or a warm winter. The truth is on -- within our transmission business, it doesn't really make any difference. We're going to make the same money, whether there is higher -- whether it's higher demand or lower demand on the systems. We like to see higher demand because it means that people will be buying more capacity in the coming years as utilities start to run out of capacity and they're utilizing it. We hit another peak day here about -- on Transco, we hit another peak day here about 3 weeks ago. And despite a fairly warm winter, we continue to hit peak days on the Transco system. So this is a really interesting picture that shows our continuing segment EBITDA. So this is the business of the assets that we continue to hold, and you can see how remarkably steady that is. The light gray up there is EBITDA that was associated with asset sales. So if you think about the way the growth in the blue has been, and you can look at it and see clearly the driver of our cash flows and the correlation is to that orange line, which is the combination of our gathered gas, gathered volumes and our transmission capacity. And you can see how steady our growth has been and very consistent with our contracted capacity and our gathering volumes. And it's getting more and more that way as we've sold off some of the high -- some of the commodity risk businesses back over the last 2 or 3 years, but extremely steady and predictable cash flows coming out of this business today. And you say, "Well, how are you exposed to commodity prices?" And if we look at this, this is those same two -- same that -- same EBITDA and the capacity and volume that we just showed on the prior, starting indexed at 100 there. And you can see that the EBITDA has outgrown that a little bit just because obviously, we get better and better operating margin as our volumes go up. But important to see the kind of swing in prices in both oil and natural gas and how very limited impact that has had over a very long period of time, very limited impact that, that's actually had on our EBITDA. In fact, it's really hard to really draw any correlation in here. And so that's -- this is not by mistake. I can tell you there's some accounting adjustments that have occurred in here, so things like revenue recognition changes and so forth. But the base volume business has been growing steadily without regard really to commodity prices. And probably, importantly, our business, very little, if any, of our businesses is made off of supply and logistics or marketing margins. So we're not exposed to basis differentials. We contract long term for our pipeline capacity. You'll see in a lot of other peer businesses, you'll see a lot of what they call marketing margin in their supply and logistics, where they're trading bases across their pipelines and having short-term rates. That's not how we contract our business. We contract our business over the long term. And so that's why you don't see much movement there. This is just showing where all the various elements of our cash flow are coming from. And so you can see the nice thing about our business is a wide variety of sources of earnings coming from our business. Certainly, the foundation of that is our long-haul pipeline that you can see down there on the bottom. So about 44% of our EBITDA in '19 -- or sorry, in '20 now coming from the long-haul pipeline business. And then you can see the balance coming either from the deepwater or our onshore gathering and processing business there, mostly in green. So this is a look of the contracts that stand behind our long-haul pipeline. And I want to start off just introducing this slide. A lot of concern right now around bankruptcies occurring and credit crunches that producers are going through right now with both low gas prices and low NGL prices. And I certainly continue to think we'll continue to see more pressure on that front. But what I want you to understand is, when you think about bankruptcy risk and you think about credit exposure, you really should be focused on the long-haul pipelines and the processing contracts. The gathering contracts themselves, when you gather back to the wellhead, we don't really care if the bank is paying us or the producer is paying us. But we do get paid. And I've been in this business a long time and do not have -- we do not have an instance where we had not gotten paid on our gathering contracts. In fact, EXCO went bankrupt last year in the Haynesville. We had a fairly high rate because there was an old Chesapeake rate in that area. And we got paid in full, no renegotiation of that contract. We got paid in full. There are not instances, and if you find one within our business and within the gas gathering business, I'd love for you to point it out to me. But this just does not occur. So we've had plenty of producers go bankrupt on us, but the bank looks at it. There is no other way to get your gas to market rather than through our gathering systems because it is a unique system that is only there to build. They are not competitive systems. If you look in and around the scale of our business, there's not competition because the producer made a very large-scale dedication in the area. There's one pipe -- one small pipe going to each of those wellheads. And to duplicate that after the reserves have declined is just not feasible, and that's why it doesn't happen in these markets. You think about that when you've aggregated a big volume, and you're at a processing plant and there's alternative processing to be done, those get rejected all the time. That happens in bankruptcy. And so processing contract that's not held that -- where the processor doesn't own the upstream gathering or a long-haul pipeline like on intrastates and smaller interstates, where the producers are holding a basis differential -- sorry, the basis differential has come in well inside of the contract that the producer is obligated to pay, those are where the real credit exposure is. And that's really where investors should be focused, is understanding what the long-haul obligations are and what is being realized there, particularly when the basis differential is now well inside of that. So if you look at places like the Haynesville, Haynesville was overbuilt in terms of long-haul pipeline capacity. A lot of those tariffs are still in the $0.30 range, even though the basis differential between the Haynesville and the markets they serve is only $0.02. So if you want to really focus on where there's going to be problems on this, you really should be focusing on the long-haul piece of the pipeline and understanding the credit. And that's why we're showing this slide because this is really where the risk exists from a bankruptcy standpoint. And so you can see for us, about 7% of our firm contracted capacity on our long-haul pipes is coming from producers. Most of that is Cabot coming out of the Northeast and obviously a strong credit for us. Very little beyond Cabot up there in terms of any exposure that we have on our long-haul pipelines. And so -- and we do not have any -- we -- people confuse a lot of times that we do so much business with Chesapeake. We don't have any processing or long-haul contract with Chesapeake on our transmission. It's all gathering back to the wellhead. So this is -- and I think a lot of the concerns around the producer health and so forth, back behind our systems and the credit exposure has really stirred up the market. And you can see that our yield relative to our coverage has really blown out relative to our peers here. So you can see kind of the curve that would be -- that you would see kind of starting up at the top left and coming down to the bottom right would really be where that curve is and be somewhat asymptotic if you normalize this. Obviously, it's not a very big data set here. But this is our primary C-Corp peers that we compete against in the space. And we think we have a very attractive yield, given the coverage that we have and given the fact that we're investment grade. And we think we should be well back inside of that, particularly if you look at where we stand in terms of growth opportunity and the stability of our business. So this is a picture of what we did in '19 from a free cash flow generation. And so if you think about the degree of coverage that we have over and above our dividend, you can see here, this is on the left-hand side, that's our DCF plus the proceeds from asset sales. So as I said, we took about $1.1 billion in asset sales last year and on -- and added that to our $3.76 billion of distributable cash flow before maintenance. And then we add back the maintenance capital over here on the right just to try to normalize these 2 pictures. And you can see last year, we had about $0.5 billion of excess cash flow after the benefit of asset sales. This year, without making any assumptions on asset sales, we're going to have about $100 million of excess cash flow in the business. And pretty rare, I would tell you, in this space to be having that kind of excess capital in the space. So we think that this number is going to continue to grow for us. And we'll continue to improve our balance sheet and then find other alternative uses of that capital once we've gotten our balance sheet down to where we want it to be. So now I'm going to switch over to kind of looking at the fundamentals behind the business. And so this is more of a broader industry picture. And then I'll finalize here with some looks at the growth projects that are coming out of these fundamentals. But really important to see here that natural gas is the answer we have right now. I'm not saying that eventually we won't come up with better answers. But right now, natural gas really is the answer for lower emissions. Every year since 2005, the #1 contributor to CO2 emissions reductions in the U.S. every single year, it has been natural gas, more than renewables and by a pretty wide margin more than renewables. So if you take the difference between how much gas is taking coal out of the power generation versus renewables taking coal out and the delta in emissions, you'll see that natural gas has been the primary contributor to our emissions reduction here in the U.S. And frankly, that's going to spread around the globe and really provide a lot of opportunity for continued reduction in emissions. If you look over on the right-hand side, this is pretty amazing if you think about the cost, we've got a project in the north in New York City right now going in. And people are saying, "Well, we want the heat to be provided by electricity." Electricity is 4.5x more expensive, and you're not actually going to reduce emissions because today, only 4% of the power provided in New York -- in the state of New York, only 4% of that is coming from solar and wind. And that's before you try to add on this heating load. So if you try to add on the heating load, you'd just be moving further and further away. And so until you get to the point where you can actually meet the existing electric load with renewables, you're not putting any dent in emissions reductions. A real answer for emissions reduction is to go after the 24% of the heating fuel that is still in the state of New York that is coming mostly from heating oil and refinery gases like propanes and butanes. So that's where most of that 24%, a lot of emissions reduction opportunity still in the state of New York. And you can see it, it's at a much lower cost. So if you think about trying to fund, continuing to try to fund our emissions reductions in the U.S., doing it with subsidies, I was -- I spoke on a panel yesterday, and the gentleman before me, Congressman Kurt Schrader, spoke before me, and his solution was to spend $150 million to $200 billion in innovation technology to have us in a place by 2050 to be carbon-free by 2050. And the question pivoted to me, "Well, what do you think of that plan?" And I said, "Well, I haven't read that plan and so I really can't comment." And then I was advised, there isn't anything in writing. It is just that. And so this is the challenge that we face, is we have real opportunity right now that can be privately funded to reduce our emissions, and we've got to be going after it. We've got to be taking advantage of it, and we can always decide to spend public funds on emissions reductions. But when we have them right in our hands and they're privately funded, we've got to be taking advantage of those. And so you're going to be hearing a lot more from Williams and from the industry associations this next year about really starting to take advantage and getting -- what the concept I'm really trying to sell on this is the present value of emissions reduction. Like don't tell me what we're going to do 20 years from now. We have a real opportunity right now, and we should be capturing that. And I can tell you, I think that gas is going to be front and center on the boat here domestically and around the world as we get more and more serious about addressing climate change. So this is something that we have continued to harp on and that -- because we -- people get really worried about gas prices going down and thinking that's a bad thing for Williams. In the short term, it likely -- it puts pressure on our producers. Capital gets pulled away from drilling. And so in the short term, it pulls pressure. But what you really have to think about what drives our volumes and what drives that capacity, remember on the front end of the presentation, I showed you the 2 things that are correlating to our EBITDA growth, our sold transmission capacity and gathering volumes, the combination of that, that is going to get driven by demand. And you can see here on the left-hand side, you can see what's happened on prices. And you can see on the right-hand side, what's been happening with demand. So those were forecasted demand in 2013, back when we had prices between $4 and $7 on natural gas. And you can see, as prices have come down, the forecast and the actual demand has continued to rise on the backs of low price natural gas, and we believe this is going to continue to drive our health. So yes, we'd like to have a healthy producer community and a healthy energy. And so we think the current pricing needs some correction for that to happen. But we do not want or need high prices. We want to see relatively low prices and ones that make the best -- the winners place people like Cabot, that can continue to be successful in that kind of environment or what we're expecting to occur. And so this is just a look on the global side. And boy, you can find a lot of different forecasts. But on this picture, they're not very different about oil growth, oil demand growth versus natural gas demand growth. Again, it's because it is much cleaner and it's 4x cheaper than oil on a worldwide basis. And so we think natural gas is going to continue to outpace oil and petroleum products from a demand standpoint. And so we think Williams is going to -- we're going to continue to position ourselves up against this opportunity. This is a picture of -- so where the gas is coming from in the U.S. And so a lot of people talk about, "Well, yes, it's great. We've got low gas prices, but all the gas demand is going to be met by the Permian." And so this is what -- this is a picture of -- from February '19 through January '20 of the average 92 Bcf a day of production coming out of these various areas. You can see, obviously, the Marcellus and the Utica has continued to grow. The Permian, you can see very little from gas-directed drilling. Most of that's from oil-directed drilling, and then you can see the other basins. Probably the biggest surprise this last year was the Haynesville in terms of rate of growth. I think once the hedges start to roll off with a lot of the private equity-backed companies out there, we'll see that back off this year because a lot of the drilling that occurred last year and some this year has been based on hedges. I think we'll see that slow down a little bit. But the point is -- to take from this slide is that today, 67% of our gas is coming from gas-directed drilling. Well, why is that important? Because we have to have a price signal. The Permian and the Bakken cannot keep up with demand if we're not sending a signal to these gas bases to continue to drill. So if you look at -- here's what would happen if we didn't have enough price signal set to drill. Here's the decline across these various basins. You can see the Lower 48 demand. That's a Wood Mac second half of '19 demand. Again, you'll see the same thing. No matter who's demand picture you pick up, it's about 3.5% to 4.1% CAGR growth in natural gas demand, and you'll see that from about anybody. But look what happens if you're not sending a signal to drill, and all you're getting is the declining natural gas production. The Permian is not going to grow any faster than we can build pipelines out of there. We're building pipelines right now. If you look at the schedule, we're building pipelines of 2 Bcf a day pipeline about every 18 months. So that's about 1.6 Bcf a day of growth, the demand. So if you take 4% on this 90 Bcf a day, that's clearly not enough to keep up with that demand. And so we continue to remind people, we can't just abandon. No matter how panicked people are about current prices, we're going to have to ultimately have a price signal that supports drilling in these natural gas basins. So now moving back to Williams and what these opportunities are representing for us. So this is just our Atlantic Gulf transmission business. So this is Transco and Gulfstream. And you can see here the projects. We have about 20 projects in backlog that we're working right now. And those are moving ahead very nicely, particularly on the power generation and the industrial side. And we have some expansions into some of the LNG facilities. We're the only company that has a pipeline into all 4 of the states that serve LNG. So we serve Cove Point today in Maryland. We serve -- we go through Georgia, and the gas that goes down to Elba comes off of Transco. We obviously serve -- we're one of the largest servers for Sabine, and we serve Freeport LNG, and we also serve Corpus Christi. So we're already serving 5 effectively but less directly at Elba, but we're serving 5 of the LNG projects that are in service today. So we'll continue to win business in that front mostly because of the size and scale of the Transco system. It provides the LNG exporters a lot of alternatives in terms of where they get their supply. And if the ship doesn't show up or the market isn't there, they've got the ability to remarket into a very broad system on Transco. And so we've seen that to be very attractive to the LNG developers. If you look over on the right, we've got $3.2 billion on -- and again, this is just on our transmission side and just in the southeast. And so you can see here that these projects are moving ahead. The only one that is held up right now is Northeast Supply Enhancement, which is the project that goes into New York City. National Grid came out with their study that Governor Cuomo had been insisting on from them about 2 weeks ago, and it clearly laid out that the pipelines are really the very best alternative. We're meeting the growth demand in that area. And also, the state of New Jersey came and deemed our application for permit complete about 2 weeks ago as well. So actually, despite kind of the narrative you hear in the public on that, that project is actually moving ahead pretty nicely. The rest of these projects are actually ahead of schedule, either on construction. Hillabee Phase 2 is complete. We're doing some cleanup, but it's ready to go in service now. So we're about -- we were about 3 months ahead on that project. Southeastern Trail, we're about 6 months ahead on the permitting schedule, and we are actually in construction now. And so we got the construction about 6 months ahead of schedule. Leidy South, we're about 3 months ahead on the permitting schedule right now, and we did get the EA on that. The nice thing about all of these projects, including Northeast Supply Enhancement, is they're all along our existing right of ways. And so that's why our permitting is going so well on these projects, is because when you're building along existing right of way, it's a lot easier to deal with a lot of the landowner concerns and the regulatory concerns. Regional Energy Access is a project that's been approved by the Board. We are -- we have a project. We have enough volume to push ahead with that project. It's a very sizable project. But we're waiting to see what happens with some of the lingering customers from Penn East because that was a project that was going to serve some of the New Jersey market to the degree that, that project doesn't go ahead, which I think there's a good chance it won't at this point, we'll pick up some additional volumes. So we haven't filed our final permits on that because we think we're going to pick up even more projects for Regional Energy Access. So a lot of really good projects. I can tell you that, that $3.2 billion is exclusive of because we haven't started on the Regional Energy Access there. So a lot of good projects moving ahead, still along the Transco system and a lot that we are working on that are moving ahead pretty nicely on the backlog side here as well. In the deepwater Gulf of Mexico, it's probably one of the least understood pieces of our business and probably one that we have the most significant growth coming forward in. And a lot of it will be done with little or no capital. And so you can see here, this is the number of prospects that are in and around it. We announced that we did sign an agreement with Shell to go ahead with the purchase of pipe and the engineering to lay out to their Whale prospect. That is a dedicated discovery, and they will FID that. They've already made a commitment to the floater. I'm always amazed that how the majors move projects ahead and the degree of commitment they make ahead of the FID, but they've made commitments to reimburse us. If they were to back off on the project, they have the obligation to reimburse us for our pipe and our engineering on that project. So that project is moving ahead. That is a very large prospect. In fact, it's actually larger than Perdido. You don't see Perdido on here because it's in existing flowing reserves. But it's at the tail end of those pipes there on the Western Gulf. And Whale is actually a little bit larger than that and will be a very significant increase in our cash flows. Ballymore is a Chevron and Total prospect. It's also dedicated to us, and that project is very large and moving ahead very nicely. And then also Chevron's Anchor prospect, they've FID-ed that, and we're in final negotiations with them together. That gas, we actually left a sled when we laid that deepwater pipeline. And that's in about 6,000 foot of water, and we laid -- and we left a sled there to be able to connect that as well as we did for Shenandoah. So we are almost certain to pick up those prospects along there because there's really not another alternative in the area. You're going to see very dramatic growth starting in the deepwater in 2023 for us. And so we're really excited about the growth that we've got coming there. So just in closing, final message, very predictable cash flows, continued growth across really a wide swath of our business. And we think the strategy that's underpinning our business continues to be very strong and makes us a great long-term investment. And we think right now, with the yield on our extremely well-covered dividend, we think it's a great time to be buying the stock. So that's all I've got. And I don't know if we're taking questions.

You mentioned that when people assess their earnings risk going forward on the long-haul side, it's important to look at the basis differentials from where the pipe originates to where it delivers. And when I look at your map, I'm -- I don't follow this space that closely. But it seems like the Northwest pipe, it goes from the Rockies to the Northwest, maybe fits that bill. How do you think about that?

Yes. Great question. So if you think about -- I don't know if I can get back to that quickly or not. But if you think about the way our pipes are set up, we're not really a -- we're not a point A to point B pipeline. We're a high-pressure header within those markets. The only way for those utilities to serve their gas supplies, we are the only provider into those markets. So there isn't another alternative into those markets. And when -- my point around that basis differential was saying, to the degree that your only credit support or if you have a weak credit support, that's when you're going to be at risk. Almost all of our Northwest Pipeline capacity is held by those investment-grade utilities. And so it's not really a -- we're providing pressure support in there, and those are very long-term contracts. My concern is when you have a producer-pushed pipeline, where it's just to get gas out of a basin and you don't have the market conscribing your capacity, that's when you're really at risk. So thank you for that question.

But it seems like if you've got that [indiscernible] all the way to the Rockies [indiscernible] it sounds like [indiscernible] to the east side, but [indiscernible].

Yes. Well, in fact, most of our supplies today, the majority of our supplies, come in at Kingsgate on the Canadian border. But we get paid the same rate if they pick it up at Opal or they pick it up at Kingsgate. So we're kind of indifferent. It's really that last mile that is extremely valuable and that distribution header is really what we're getting paid for.

Thank you, very helpful.

Yes?

At the end, you mentioned the Gulf of Mexico. Can you just break the size and how big that could be in 2023?

Sure. So today, we've -- if you look -- do the math there, you'll see a little over $400 million of EBITDA in the deepwater today. And if you look at the size of the Ballymore prospect and the Whale prospect and you look at the kind of volumes they've reported, you'd see that, that's basically a doubling of the eastern and the western. So the -- now we're not going to see that kind of increase on the Discovery system in the middle. But on the eastern and the western systems, we could see a doubling of the revenues that we see there today. What we're not going to see, though, is we're not going to see, for instance, on Gulfstar and Devils Tower, those are 2 big deepwater platforms that we own out there, that's a very high margin opportunities, and there are some new tiebacks that are -- that Kosmos is bringing across there. Those are $10 kind of barrel margins. We're not going to see that kind of increase in there. So it -- I would just tell you, it's probably more than 50% and probably inside of 100% of increase over our current. Okay. Thank you.