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

Well, good morning, everyone. My name is Praneeth Satish. I am on the midstream team at Wells Fargo. It's my pleasure to have with me Alan Armstrong, President and CEO of The Williams Companies. I think the format, as you know, here is a fireside chat. I'll go through some questions that we've received from investors. And there's also, I think, a slido, slide deck here. So if you have any questions at any point, feel free to point them that way, and I'll try to get to it.

So I guess, Alan, we can dig right into it. I wanted to start with the crisis in Europe. And obviously, it's a tragic situation, but I think it underscores the importance of energy independence, energy security and just gas as a bridge fuel. So I'm just curious, are there any steps that you're taking to kind of help Williams benefit from this tailwind, just kind of an open-ended question to start.

Yes. Well, I think whenever we think about Europe and we say crisis, immediately, everybody thinks about Ukraine and obviously, that is a tragedy that has got everybody's attention right now. But from a very objective energy point of view, the crisis in Europe on the energy side started with a shortage well ahead of the war. And so I think there's kind of 2 big lessons here, and there's 2 factors that need to be considered. One is we are not keeping up with the growth in demand for energy. And certainly, Europe got overdependent and shut down coal and nuclear ahead of having adequate renewables power on and adequate storage on. And so that's where things started. If you look back to gas prices, natural gas prices, that crisis really started before that. And so I think we have to keep that in mind as we think about solving the challenge because it truly was a shortage before it was an energy security issue. Now there is an intense focus right now on energy security. And that obviously is driving a lot of actions from folks like Senator Manchin and really captivating legislation. And people that have been in Europe and talk to the leaders in Europe realized how -- what an incredible crisis they have on their hands and it's starting to be more than just a crisis from an industrial and from an economy perspective, people's prices, their families, utility bills, are really skyrocketing right now, and it's really capturing the attention of politicians. And I think that's starting to make its way into the U.S. perspective about what armed world might look like if we don't take care of the demand in energy and we get over dependent on one source or another. So I think it's -- in that regard, I think it's highlighted a crisis that we were headed towards here in the U.S. ahead of time. And I think that's positive for the U.S. in terms of it kind of gave us a road map about what we were up against if we didn't start dealing with the shortages that we have. And obviously, countries around the world right now are saying, don't tell me what I'm going to burn. I'm going to make sure that we have energy security first, and that is really going to put pressure on coal as a resource. And I think that if we can keep gas prices, if we can get natural gas prices back down to a more reasonable level, which I think is actually kind of important that we do that that's going to continue to open up demand for the U.S. But I do think from my perspective, we've said this all along at Williams that we like -- we think natural gas is going to have a huge future because it's low cost and it's low emissions. If we can't keep the prices low and can't get the infrastructure in place to be able to access, we are going to damage some of the markets and some of that. So -- so that on the demand side, I think that's really important. On the emission side, as an industry, we have got to take on the 2 objections that stand in our way today. One is fugitive emissions from our operations. So methane emissions from our operations. If you look at the objections to using natural gas, there's 2 things. One is fugitive methane emissions. So we have to take that on. And secondly, it is that we are building infrastructure that's going to have a short life to it. Well, if you think that, that short life is going to be because we're going to start using hydrogen, then we better be building a whole lot more pipelines because it takes a lot more pipeline capacity to move hydrogen than it does gas. If you don't think we're going to be replacing that, then it's not going to be a cost that -- so I think some education on those 2 fronts is really important. We, as an industry, though, have got to prove up that we can move gas, we can produce gas, move gas and have it to the point of delivery without fugitive methane emissions. And we're making a lot of progress on and I'm really excited of how well we've done as a company. But I think that's one of the things we have to focus on for our future.

Got it. I mean I think you mentioned, Senator Manchin, and there seems to be at least some acknowledgment at the federal level in terms of what's happening and the importance of gas. But are you seeing anything at the state level, even at the local level environmentalists? Have you seen any kind of change in their tone given everything that's happening?

I would say there's glimmers of that. But I don't have anything super concrete to offer you right off the bat on that. So -- but I do think that the pressure of costs and the pressure on the consumer and the cost for people's utilities are really going to start to come in to sites because if you think about what's happened over the last 10 years, low gas prices have really hidden the cost that's being added into people's bills, the low gas prices, allowing us to invest more in renewables and that bill really hasn't shown up because gas prices and the cost of power has been keeping that down. Now that we're back at a cost level on gas that it's not providing that coverage, we're going to see people's utility bills soaring here in the U.S., and that will bring political pressure and will bring changes, I think in the State politics.

That makes sense. Just kind of switching gears, as we look at the Northeast, it feels like it's become a bit of kind of like a chicken or the egg scenario where producers want to drill, but they say there's no takeaway capacity and midstream companies look at producers and see that they're capital discipline and not increasing production. So they don't see the need to increase takeaway. So I'm curious in terms of your thoughts there. Do you think we need more takeaway? I know Williams is working on a bunch of Transco expansions, do you feel like a larger one is required? Just kind of what's the appetite from producers?

Yes. So the next big expansion that we have coming out of the area is called Regional Energy Access, and that's a little over 800 million a day project that will serve mostly the Bradford county -- Northeast PA, so Bradford County and Marcellus. That project is going extremely well. And we're not requiring any significant state permits outside of the state of Pennsylvania, and we've already received our 401 water quality certificate which is typically if the state is going to try to hijack a project, that's the tool they use. And so Pennsylvania, though understands how important gas is to their economy, and they've been very constructive, and we have a great relationship with the State of Pennsylvania. We do have one compressor station to do in New Jersey, but we've already gotten the local authority sign off on the environmental justice requirements on that project. And so we're feeling really good about that. And we don't require any 401 water quality certificates in New Jersey for that reject. So that's still ways off. In terms of the short term and what's happened up there, and I think people don't appreciate the amount of infrastructure that goes on upstream of a pipeline takeaway capacity. But if you think about how much expectation there was for MVP to get built, all of the upstream gathering and processing infrastructure was lined up to deliver into MVP from places like Chevron's old acreage that EQT controls now, which we gather. And so everybody was gearing up to make their deliveries into MVP. So when MVP did not happen, then now everybody is in a rush to redirect the gathering systems to be able to take advantage of capacity that's still available on the westbound routes out of the basin. But all of the last year or so of planning on the gathering and processing side was the pet producers telling us they wanted their gas delivered on the outlets into those MVPs. So there's been -- we've got a big interconnect we're doing right now between our old Ohio Valley Midstream system and the Blue Racer system that we have interest in and operate now. And so we're doing an interconnect now with Blue Racer, and that will give access to those westbound pipes for some of that West Virginia gas that was planning on MVP showing up. So there's a lot of optimization that's going on. But I think it's -- I mean, I think the producers are managing really tightly, but it also shows you how tight the balance is and how good the planning is in the U.S. here when we had MVP get held up. And if you look at our imbalance, that's almost exactly the amount of our imbalance that we have here in the U.S. is MVP not getting built. That's 1.5 Bcf a day, and that's about exactly kind of the amount we're out of balance right now. And so if that would have been built, we wouldn't have this problem. So when I hear people say, well, it's not our fault. It's not the federal government's fault. We don't have anything to do with this. That's just wrong. I mean the producers aren't the problem in that case, the pipeline getting stopped is what the problem is.

Maybe we'll go to the second question here, just staying on gas prices. I know you've said in the past and you touched on it here in terms of -- for your business, low gas prices are a good thing over the long term. We're at $7 gas now. What can be done like the question says beyond the supplier response to get that gas price down? Is it more infrastructure, LNG? Is there -- what else can be done?

Yes. We have plenty of low-cost reserves here. And producers would be happy to be producing into a $3 or $3.50 gas price environment. If they knew they could get that and they didn't have a big basis differential to overcome. So yes, it is not all that complicated. It is pipeline infrastructure. We're going to -- the Haynesville is about to run out of capacity. We're going to start to see bases build before some of the capacity gets built out of the Haynesville right now. And producers have gotten pretty smart about not putting gas on gas competition in their own basins. And so that -- we've seen the producers, I think, manage around that really well. But it's -- like I could give you a lot of really complex version, but it's no more complicated than we have to have adequate pipeline capacity because producers are not going to just keep drilling themselves into submission because they're not being -- they're not being supported by investors just to grow for growth sake.

So maybe turning to the Haynesville. I mean, production growth there really seems to be accelerating or picking up. Can you talk about your recent Trace acquisition, how that business is performing? And is there a chance that it even exceeds the 6x EBITDA guidance that you put out there, just given the acceleration that you're seeing there?

Yes. And I'd say we're always pretty cautious when we look at something like that. And certainly, when we were -- we started those negotiations in October or November last year, we certainly didn't expect the gas price environment that we had at that point in time to continue. We certainly didn't expect to see the kind of pricing levels we have now in 2022. So yes, as long as we can keep the takeaway capacity and get lag built out in front, I definitely think that could exceed that. But it is going to take getting takeaway capacity out of the area because the next area we're going to see constrained, as I said earlier, is going to be the Haynesville.

Okay. Maybe turning over to that. I mean there's not just you guys, but there's a bunch of midstream companies that are looking at possible expansion projects out of the Haynesville. What is the competitive advantage that leg has over these other projects that gives you confidence. I think you mentioned on the call that you could get to FID soon. So what gives you that confidence? And maybe as a follow-up, any sense of CapEx or economics that you could share?

Yes. Well, first of all, 2 primary benefits: one, we've already gotten a substantial amount of the volumes already dedicated to it. So pretty confident in that. But two is our ability to utilize Transco to deliver to multiple LNG facilities and utilize excess capacity on Transco. I mean Transco is a network. It's not a one-way pipeline. It's very much a network. But our ability to make good on deliveries into multiple LNG facilities all along the Gulf Coast is pretty valuable to producers. And so that's one of the selling pieces that we have. It's just the interconnectivity to markets that we have on Transco.

And in terms of size and economics anything that you could share about that?

Yes. So right now, we're planning on the initial stage being a 1.8 Bcf a day pipeline. And we've -- all we've said about it is less than a $1 billion for that project. And we were able to -- pipe prices have gone -- steel prices have gone through the roof right now for line pipe and mostly because a lot of production that came out of a lot of the iron ore for a lot of the steel in Europe and the manufacturing in Europe, prices have gone through the roof for both the iron ore to make steel in the first place, but as well a lot of the big -- the mills that make that big diameter pipe. I hate to tell people, but we don't make that pipe here in the U.S. anymore. And so we're dependent on those areas that have a shortage of energy right now to be making a lot of that steel. So prices have gone through the roof. We were fortunate enough to buy an option on some of the old Atlantic Coast pipeline that got stopped in its tracks by the permitting process. And so that's put us in a really nice position on being able to hold our line on pricing on that pipeline.

Got it. Maybe we'll go to the third question on the screen here. You had, in the past, talked about monetizing your G&P assets. Obviously, in the current environment, they're more valuable. You're seeing growth out of the Haynesville, the Permian, the Mid-Con, the Northeast, but the Rockies, you haven't really seen a lot of traction there. How do you view your West, your Rockies G&P assets today?

Well, we're certainly seeing a lot of continued activity around those assets. we were able to consolidate Western, had a plant there, Patrick Draw, which is adjacent to our Wamsutter operations in Wyoming. And we were able to -- that plant is now shut down and those volumes came over to us. So we've got a couple of other places like that where we're rationalizing that business. And we think in a $3 to $3.50 pricing environment there's going to be quite a bit of activity to try to keep up with supplies, particularly if the Haynesville gets limited on how fast it can grow to do the pipeline infrastructure out of there. So anyway, we like that area. It's always been a good place for us. We're -- I think we're by far the lowest cost operator in the area, and that's allowed us to consolidate, and I think we'll continue to see more of that.

Got it. Maybe turning to the Eagle Ford. So there's more activity picking up there as well. And I know you have some MVCs in place there. Do you think you're seeing enough activity that you could get above those MVCs at some point in the next few years? Or we shouldn't expect that.

No, I definitely think there's a very good chance of that. And there's also a field there that's kind of an extension of the Austin Chalk that underlays a lot of that Eagle Ford, and we're starting to see a lot of activity around that. And that is very much going to likely drive volumes back above the MVCs that we have up there. But for right now, we're well below the MVC out there right now.

Okay. Got it. This is, I guess, more of a philosophical question. But the last few years, the midstream company has done a good job just reducing CapEx, reducing operating expenses, just becoming more efficient. I guess, matching the E&P industry. But now you're starting to see drilling come back and companies are talking about new projects, CapEx going up. I think investors are worried that as you go back to spending capital that returns could go down, you kind of get back to the same situation that the midstream sector saw itself a few years ago. What would you say to that? Do you think that's still a risk? Or do you think the industry has kind of learned its lessons and are much more focused on higher hurdle rates this go around?

Yes. Well, I do think that the large companies these days have done a really good job of staying focused on returns. I would say from a Williams perspective, it's very clear for us. Our incentive comp, our long-term incentive comp as the leadership team is -- half of that is all focused on return on capital employed and growing our return on capital employed. So -- that is a very clear signal for what we need to do and what drives us and it drives us to be very stingy with capital and making sure that we're optimizing and spending as little capital as possible to drive our business. That mindset, I think, is really keeps us very focused on that issue. And I think it's a very powerful tool. The other thing we have is an important measure is our operating margin ratio, and we look at that relative to our peers in the space and where our operating margin ratio is and we constantly focus that, right? I'm not sure you necessarily want to be at the very top of that because one of the ways you could get there is to not invest what you need to on keeping your system safe, and we're not going to let ourselves be in that situation. But given the scale, the unique scale that we have in the natural gas space, we have an ability to be a very low-cost operator because we're not all things within the midstream space. We are very hyper focused on natural gas. And because of that, we ought to be able to beat any of our competitors if the money being spent on maintenance and safety is the same, we ought to be able to beat anybody because we don't have all kinds of different operations who have pretty narrow focus around natural gas.

Got it. Okay. I wanted to touch on your partnership with Context Labs and Cheniere's and others kind of focused around low emission natural gas. I guess the question is, is there demand from utilities and LNG buyers for this type of gas? Do you feel like it's helping you win new contracts and new business, new revenue opportunities? Or do you think it's kind of just inevitable the entire industry has to kind of go towards this model, so it's kind of a cost of doing business?

Yes. Well, right now, the answer is, there is not an incremental market or margin for responsibly sourced gas. However, we strongly believe there's going to be. And if you look at what's happening on the LNG buyer standpoint, it used to be that the big utilities in Europe were -- they were relying on the Totals and the Shells and all the big LNG brokers around the world, and that's really where they're buying their gas from, now because there's so much focus on it, the utilities, the Uniper's of the world and so forth are coming directly now to U.S. suppliers and saying, okay, how do we organize a deal that pulls this through and their interest in that low carbon emission, we think, is going to be pretty important. And we think being able to track it in a really credible unassailable fashion is going to be really important for the future, not this year, not next year, but longer term, we think being able to really show that your fugitive methane emissions are truly at 0 is going to be really, really important. And so we're very focused on doing that, not in a spot sample kind of way, which is a lot of what's being utilized today, and we just frankly think that the satellite flyovers and the aerial surveillance is going to really be -- that's going to be a great conflict for a lot of these spot samples. And so we think we've got to do it in a much more effective way, and we've got to be able to track the data that we can prove up without anybody doubting and we actually are engaging with the environmental opposition to be a part of our effort because if truly that's their objection, we can handle that. If you think about all the other issues that there are for reducing emissions around the world, the technology that people are counting on, the storage technology, the cost coming down on a lot of long-term storage technology and all the things we're counting about technology on the one hand. And on the other hand, we don't think we can keep gas in the pipe. That's just to me, is not -- it's not rational to think you can develop all these other great technology, but you can't figure out how to keep gas in the pipe. So we're very focused on that, and we want to be able to do it with partners in a way that we're not fighting them. We're proving up that we really can make that happen. And so our partnership with Context Labs, which is a group from MIT is all about that, all about taking and using blockchain technology all the way along the path of a gas path and being able to prove up where emissions came from and where there's potential methane emissions and us being able to document that, that did not occur.

Great. Maybe staying on this theme. So you're working on responsibly sourced gas, as you mentioned, solar, hydrogen, RNG and you've got the largest pipeline network in the Northeast. So I guess I'm just kind of connecting dots. But do you see a future where there are states like New York and New Jersey that are very anti gas, anti-pipeline. But do you think there's a point in time where you could offer them a project that's 100% powered by renewables and is delivering either RNG or hydrogen into the state. Do you think, one, there will be support for that, I don't know, maybe they'd still oppose that. And two, is that something that you'd be interested in at some point.

It is. And in fact, I would say the first glimpse of that was with our Regional Energy Access project, where we actually worked with New Jersey Natural Resources in putting in -- allowing them to put solar along our right-of-way to put a pilot hydrogen project to be able to blend hydrogen into that expansion in New Jersey. And so while it's not an economically feasible solution, it's certainly a politically feasible solution. And if people -- like -- so that's worked very well for us in terms of gaining political support for that project. And so I'm really, really excited about that because Williams is full of a bunch of engineers that, frankly, by God, we're right, and I don't need to explain to you why we're right, we just are. And -- but that doesn't work in a political environment and we've really learned in this political environment, we've learned to figure out how to meet people's needs and to be able to have politicians be able to say, well, no, they're actually looking to the future by allowing hydrogen in the pipeline. So that's one area. The second area that I think we've got some work to do on it, but is the fact that, for instance, the project that was NESE, which we still have the certificate for that project would have gone into Brooklyn and the Bronx, and help National Grid take on additional incremental load, which, by the way, despite what you might hear their load continues to rise, and they met it this last winter by trucking in compressed natural gas and LNG from our LNG facilities in the area. And so it's the concept that, well, we're going to stop using gas and the growth is going to go away. That is not what's occurring. And eventually, the facts are going to catch up with that. But again, I mentioned earlier, the 2 arguments against natural gas is the fugitive methane emissions and two, that we don't want to invest capital in something that is going to be a stranded cost for the future. Well, if you really think you're going to be using hydrogen in the future in those markets, you have to build bigger pipelines. So hydrogen is about 383 Btu versus 1,000 Btu for natural gas. So that's the kind of increase in capacity you have to build if you're going to utilize hydrogen. And so we're using that argument to say, well, it's not going to be a stranded asset because if you're going to use hydrogen in the future, off of your wind power because that's one of the notions is they're going to use all this excess wind power -- offshore wind power generation to create hydrogen. If that is your plan, then you're going to have to have more pipeline capacity into those markets and because the gas capacity is not going to be adequate. So anyway, so we're thinking through what I call political solutions for the future that make us right where we're right that that's still going to be a feasible or that folks are correct that say it's going to be a hydrogen future. In either case, we're going to need more pipeline capacity, and that's what we want to try to win the arguments around.

Got it. Maybe switching to capital return. Williams has a $1.5 billion buyback authorization in place. You haven't done any buybacks yet. And I know you've got kind of a quasi-secret formula that you use here to figure out buybacks. That's the spread between the equity yield and the cost of debt. But since you announced that program, the yield has gone down and the interest rates have gone up. So it feels like it's become even harder for you to do buybacks. So I guess at this point, if you are going to -- should we expect any buybacks in the near term? And if not, what is -- how are you going to return capital to shareholders?

Yes. Well, I think, obviously, the yield has started -- still, I think, given the growth that we've had and continue to have the yield has come in some. And our growth has continued to be outsized relative to our dividend growth, to our EBITDA growth and our AFFO growth has continued to be quite a bit higher than the dividend growth we put out. We just built a bunch of coverage, frankly. And so obviously, one of the ways we can do that is by increasing the growth rate in our dividend. And so that's certainly something that we'll look at as well because we certainly have a lot of capacity to do a lot of different things right now.

Got it. Maybe looking at these questions on the screen. So I don't know if you know the answer to this one, but the Haynesville be called on for gas. Has there been any concerns around the drilling locations in the Haynesville, the inventory life because as you mentioned, it probably is going to be the main area where you're going to see gas growth to fill all this LNG demand?

Yes. No, I think the way we're going to meet the gas supply requirements here in the U.S. are first, the Haynesville that does have a limited life to it. The good news is, used to people thought it was just a Haynesville play and the Bossier was an economic. People are now dual completing the Bossier and the Haynesville and that has put a whole another layer of inventory in that basin right now. So inventory is pretty good there, but at the rate that it's getting drilled up as we speak, that's maybe got a 5-year kind of life to it under current economics before we start seeing some challenge on inventory out there. But the Permian is going to be right behind that and the Marcellus and Utica ultimately will really be -- that is the large, long inventory basin that we have here in the U.S. And that will have the capacity if we can get the pipeline capacity built, that will have the capacity to keep up with about any growth number that you can put up against natural gas here in the U.S. for a long time.

Maybe I'll combine that first question with just a general question on M&A, whether you're looking at that now, how does it compare to organic investments. And if you are looking at M&A -- is it G&P that you want to pursue or more on the renewable side or dislocated pipeline assets, LNG export terminals, what are you looking at?

This is pretty much a natural issue for us because, again, we're very hyper focused on our return on capital employed. So for us to do an acquisition, we have got to bring a lot more value than just a return on capital. We've got to have much higher returns. And so that keeps us focused on areas where we've got a huge competitive advantage where we can take capital out of the system that we are otherwise going to have to invest in. And so I would say it really keeps us focused on bolt-on opportunities where we can go in and take out costs, both operating costs and capital cost and get a much larger returns than the auction market. And you don't see us -- we haven't made an acquisition in an auction, and I can't remember when. Because we're very focused on things that are very specialized to us that we have a lot of value to bring to the table. And that is because we are so hyper focused on our ROCE. So I would say that's going to keep us pretty too. But we have a lot of opportunity because we do have great scale in a lot of basins and as we're seeing the activity pull up in some of these basins, we do have quite a bit of opportunity, but it's going to be the very high return, high confidence tuck-ins that we've been doing, like Blue Racer, Trace, UEO, so those kind of acquisitions that we've been doing.

And this question, maybe I'll kind of broaden it out too, you have kind of an acreage that you picked up in the Wamsutter and in the Haynesville. Can you just talk about that broader strategy to convert that to midstream cash flow or sell it outright? Where does that stand?

Yes. So just to remind people here, we have 2 areas up there. The area that we -- the acreage that we settled as part of the bankruptcy process with Chesapeake taking the South Mansfield properties, and that's about 55,000 net acres in the southern portion of the Haynesville. So it's Hayneville/Bossier combined. And that was an area that Chesapeake didn't intend to drill for quite some time, and they were going to focus their efforts on the Spring Ridge field, which is just in the North and South Mansfield. And so from our perspective, we had this late and midstream capacity. And really what we wanted to see happen was we wanted to see the volumes grow on it because we make a lot more cash margin in a normal pricing environment. We make a lot more cash margin on the gathering system than we would owning the E&P operations. So we wanted to just make sure that gets drilled up. That was our goal. That remains our goal. We got just lucky on price. But at the end of the day, our focus was on just getting the volumes drilled up that's happening. It's happening very rapidly. And -- but at the end of the day, we're going to be looking for volume expansion on our systems. And then once that's occurred, then it will be a matter of letting that -- monetizing that to a working interest, somebody that's interested in buying working interest out and buying the PDPs out of that system. From a capital standpoint, our deal with GeoSouthern included them carrying our capital requirements on that for the first $60 million on the drilling. And then over time, the PUD, so not the producing acreage, but the undeveloped acreage, we start giving them an incremental -- they start earning into those PUDs over time. So our capital side goes down because we won't be -- we will own less and less of the PUDs, but they'll continue to drill out that acreage, but our capital requirements get pretty low pretty quickly on that. So anyway, that's going very well. GeoSouthern has been a great partner. It's easy for people to be happy when we have this kind of pricing environment and you're in the gas drilling business. But -- so I'm not sure how it would go if we were in a tougher time, but right now, everything is very good there. And it's going actually better than we would have expected to. And -- but our goals on that and in the Wamsutter where we had late and midstream capacity, we were going to make a lot of cash margin, if volumes flowed. We didn't really care what the E&P economics were. We just wanted to make sure the volumes got developed. And at the end of the day, we're getting the benefit of both. We're getting some really nice returns on the E&P and we're getting the -- the volume growth on the midstream side. So that's worked out very well for us.

Well, I think we'll stop it there. Unless you want to make any closing comments, I'm good on my end.

No, thank you very much, Praneeth, and thank you all today for attending. Thanks.

Thank you.