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

That sounds great. If we could maybe now move over to natural gas in the Northeast. Pricing has seen some strength lately, primarily around what the concern around what inventories can look like next year when withdrawal season is over. And the debate has been whether or not these producers in the Northeast go above maintenance mode, and may they hedge more sort of position themselves to produce more than maybe what was anticipated 6 months ago, or just given their debt maturity profile, they take the extra cash and use it as an opportunity to pay down debt. How would you say your conversations are leaning today with your customers?

Yes. I mean, it's pretty hard to ignore the fact that we've seen the calendar '21 strip from March to now from March 1 to September 1, we've seen it go up by 30% for the whole calendar strip, which is a pretty amazing move. And if you look at the -- in the same time period, if you look at the 12-month forward, we've seen that move up by 44%. So to think that, that kind of move in the futures price wouldn't change people's minds about what they're looking at, it's just not realistic. That's a really nice move up in price. And as well, we've also seen the basis differential, what's available to them in terms of being able to lock in the basis differential between Henry Hub and Leidy or Henry Hub and Tetco M2 is pretty attractive as well. And so we think those are going to drive changes. The question of, what are your producers thinking? I would tell you it's a pretty big mix. Some of them are charging hard. Right now, we're seeing some really great success and activity by Encino in the Utica. We are seeing great success by Southwestern in the Marcellus -- in the Southwestern Marcellus area. And we're seeing a lot of planning going on and a lot of requests for studies on our part about expansions available from some of our customers up in the Susquehanna and Bradford County systems. And I would say too early to call exactly what they'll do there. But like any prudent operator would be doing, I think they're planning and they're trying to understand what the cost would be to be able to take advantage of that forward pricing. So some great margin opportunity for the producers up there. But I would tell you, it is kind of a mixed bag in terms of how quickly people are responding to it. We also are seeing -- we saw Chesapeake bring the rig back into the Haynesville, and they're having great success with their development there in the Haynesville as well. And we've got other -- 3 other producers that we're working with on some development plans in the Haynesville as well. So really, any of the dry gas areas are responding either through a pretty aggressive drilling already or on our systems or planning for next year and making sure that they can take that on. So I don't think there's a one-size-fits-all to answer your question. But a lot of change in behavior, whether it's through planning or actual drilling activity.

You mentioned Chesapeake. So actually, if we can move over to just what goes on in bankruptcy. Years ago, there was a lot of chatter around how some gathering contracts, if structured correctly, or covenants that ran with the land, which made it difficult to reject in bankruptcy. Can you just give us your views here on how your contracts across your different assets would hold up in bankruptcy part. And then also specifically, if you could address MVCs that are part of a gathering contract. Do these hold up? Or are they separate from the gathering contract?

Yes. Maybe to take that latter part first, I just -- if you were to actually be looking at that document in front of you, 1 of our gathering contracts, it would be almost impossible for somebody to say, well, I want this piece of the agreement, but I don't want this piece of the agreement. So while there might be some process within -- whilst somebody is in the post-petition period as there might be some arguments to say, well, it's unfair to make them pay the MVC, pay that deficit in the period. But at the end of the day, we haven't seen and I don't think there's any evidence anywhere of a bankruptcy judge saying, well, you can take this part of the contract but you can cherry-pick elements of the contract. So it just has not been done. And we don't see any evidence in any of the processes that we're working on right now. We don't see any evidence that either side thinks that that's an achievable outcome to be able to divorce themselves of the MVC. They've either -- they've got a choice of either rejecting the contract maybe. And in most cases, they don't even have that because of the way the contracts and the way the contracts run with the land. But even if they were to win that argument, which we think is a very low profitability, that's really would be their option at the end of the day, is one or the other. And frankly, getting your gas out of the area without gathering service in any of these situations would be extremely difficult. So to answer the last part of your question around MVCs, there's no evidence of that. There's no reason if you're -- any of you're involved in commercial contracting. There's just not really -- it's not like we do a gathering agreement, and then we have a side letter that says, "Oh, and you have to pay us the MVC." It's 1 integrated contract and I think that's the way the courts will continue to look at those. On the question of kind of the process, I would say, first of all, we've had the benefit of perfecting these agreements over time. And if you think about the Chesapeake agreements, all of those contracts with the exception of Bradford, all have been amended in very modern times. Haynesville was renegotiated. Eagle Ford was renegotiated. And so we have the very modern language that we think will stand up to any challenge in court. We love the venue that we're in with -- on the Chesapeake case. And I think they really respect that as well because, as you know, they haven't asked to reject any of the gathering contracts despite rejecting a lot of the downstream service contracts. And so we feel really good about that. Just to remind you, that is in the Southern District of Texas, and it is with Judge Jones who was a really outspoken critic in the case of Sabine, was an outspoken critic against the New York Bankruptcy Judge that ruled in Sabine case and was also the same venue for Alta Mesa, which held that court. So I think we're in really good shape with our cases. And we think the most relevant case to look at is the Alta Mesa case, if you were to think about how the outcome would be here. We think Sabine is not even all that relevant and not even a very similar situation, either in contract language, in the physical services that were being provided and certainly not in terms of the judges that it's in front of. So we're feeling really good about where both the Eagle Ford, the Haynesville and the Bradford all stand in. And frankly, in the Bradford County, that is the lowest rate of any Marcellus gathering system that we have because it was a cost-of-service model that really worked well. Their volumes have been extremely high, and therefore, they've had the benefit of a very efficient capital deployment that's allowed for even lower rates up there. So we feel really good about where we stand there. We're excited, really, honestly, to see Chesapeake get this burden off their shoulders in terms of debt and really get back to doing what they do extremely well, which is growing and developing reserves that are dedicated to it. So I would tell you, from my vantage point, as much as I know, that's a serious headache and not what the management team wanted there. We're excited to see this kind of passing of that issue and then getting on with growing their volumes and us helping serve them in a very healthy relationship.

So speaking about strengthening balance sheets, you, yourself, Williams has made some progress on the deleveraging front despite all that's going on in the world, less CapEx opportunities, has definitely helped while EBITDA has been resilient. I know it's early to talk about next year, but NESE was likely a good size of CapEx originally slated for 2021. And now the removal of it probably has lightened up the CapEx load for next year. Should we think that deleveraging will continue into next year? And do you still feel your current leverage target is the right threshold?

Yes. Again, maybe I'll answer that -- into that first. In terms of being the right target, what we've laid out is a 4.2. And that's just on a GAAP basis. When the rating agencies make their adjustment to that, it winds up being about 4.5, which is where Moody's has told us we need to be to get to the Baa2 and the BBB flat at S&P, for which we already are BBB flat at S&P. And so that -- we still think that's the right spot for us. And we are making good progress on reducing that. We do expect to have some free cash flow again next year. And so we think we're on the right path to getting there. And I think as well the fact that how well our cash flows have held up during this very volatile time period, both with crude oil prices, and with the impact of COVID on the broader economy, and we're looking to how well our businesses held up, we think that gives the rating agencies even more confidence that the number or that, that position they have for us perhaps is even maybe a little strong. But we're still focused on the 4.2s, as we sit here today. And once we get past that number then we'll look to see what the best use of our capital is beyond that, and it could be further debt reduction. But we really don't have to make that call just yet in terms of what the best use of our capital is until we reach that point. And so we are making good progress. In terms of our capital budget for next year, it's -- NESE was expected to be a big part of our investment, our capital budget for next year, but we do have -- remember, we do have 3 things that will be drivers for next year and perhaps a fourth. One is starting the development of a well project that we would be building for Shell and Chevron in Deepwater Gulf of Mexico, and that's an expansion of our existing system that serves in the Perdido. Two is Regional Energy Access project, and that permitting is going pretty well. And we could be, not saying we definitely will, but we could be in a position to starting to spend capital on that next year. And then third is gathering expansions in the Northeast. As I mentioned earlier, there is planning efforts going on for expanding our systems -- gathering systems in the Northeast that could put upward pressure on our capital budget for next year as well. So those are still TBD, but we're hopeful. I would say Regional Energy Access is probably at the later end of next year just given how we would expect the permitting to go. But we're still very hopeful in getting started on that next year.

So maybe actually on that theme, to wrap up this chat. Midstream has long been thought of a business where you have to spend money to make money. You talked about -- you just listed 3 of the near-term projects that you're looking to do. But how do we think about the growth of the business more longer-term against the current backdrop where spending is not what it used to be? And could you slice up the investment opportunities you see for Williams across your different type of assets?

Yes. Well, I think we'll continue to see -- we have so many -- we have so much work ongoing right now in looking at expansions along our transmission systems that I would expect to see that capital continue to be around 50% of our capital budget. I would expect to see our gathering business would be somewhere in the 25% of that and our deepwater systems maybe being 15% of that. And then beyond that, for instance, we got early room for the solar investments that we talked about as well. And so that's kind of how I would see things rounding out here in the near future. The good news is particularly in the Northeast, as we've said many times before, a lot of our big capital spending has been done in that area. So the big systems are in place. At this time point, it's a matter of very high-return capital investments that we get because we're just adding a small amount of capital, but we're still getting the full rate of the whole service. So said another way, when you first go into an area, your returns are very, very low on an ROE basis because you're having to build out big systems that are expandable for the long term. And it makes a lot more sense to build that with big pipe and not have to be coming back every other year and adding capacity, but putting into bigger trunk lines and then just adding compression. And that's clearly how we've invested up there. And so you're seeing our returns on capital up there move up really rapidly because how efficient our expansions are in terms of serving our customers. So lighter capital, much better returns for quite some time in the Northeast. Fairly similar picture in the deepwater Gulf of Mexico. We've listed 4 projects in the deepwater Gulf of Mexico that we believe in -- around 2024 would be generating about $300 million of new EBITDA in the deepwater Gulf of Mexico. And only 1 of those it looks like is going to require any capital on our part. And so this is a really attractive time period for Williams because we have been investing thinking about the business in the long term, not trying to just turn a quick buck, but really thinking about how we have a competitive advantage long-term and how we can drive high returns over the long term. And so those big investments that we've made over the last 5 to 10 years in growing those positions up there are really -- really have us well positioned now for some high incremental returns on our next phase of expansion in the systems. The pipelines really aren't like that. The pipelines -- we don't get any windfalls returns. We generally get a 6x multiple on our expansion. So it's a very attractive projects. But in the pipeline business, we do have to spend capital to grow our EBITDA. There isn't any -- because of the regulated systems and we're at max rate, we're already charging max rate on our pipelines, there's not anything that disclose to us easy versus the big gathering systems. You can get very high incremental return opportunities because you've already got the presence and big assets in place. So that's how we're positioned for the next 3 or 4 years, and we feel really good about the not necessarily capital investment because, frankly, I'd be a lot happier to see our EBITDA grow with no capital investment. And we're going to see more leaning into that over the next several years for Williams.

Well, Alan, I'd like to thank you and the team so much for your time in sharing your insights today. And I'd like to thank everybody for tuning in. And hopefully, we'll see you all next year in-person.

Great. Thank you, Christine. Great seeing you. See you later.