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

Good morning, everyone. Thank you for joining us this morning. We are very excited to be joined by Micheal Dunn, COO of Williams, to talk about all the great things going on in the Williams story right now.

So with that, I'll kick it into questions. If you guys have questions, I think you're able to send it here and I can try to work those in, if we can. But Micheal, maybe just starting off on the first quarter call, Williams increased the guidance. And I was just wondering if you could kind of walk through the factors that drove it higher there.

Sure thing, Jeremy. Thank you, and thanks for hosting us today. We really appreciate the opportunity to talk about The Williams Companies. We really saw the year unfolding there after our first quarter earnings call in a very favorable fashion when you look at our base business. We saw some significant growth that we expected to occur, and that was really one of the drivers that saw us to increase our guidance. We also saw the fact that we had the Trace acquisition that we expected to close on, and that was another component of our increased guidance for the year. And then finally, we just saw the commodity price situation with our upstream acreage that we have today, where we've put together a price curve, obviously at the first of the year and embed that in our guidance. As we all know, the price curve has moved up throughout the year, and we certainly saw that and envision that after our first quarter earnings. And so that's another reason why we really increased our guidance for the year there. And we have a high expectation of our production coming on in the Haynesville at or better than what we projected when we initially established our guidance for the year.

Great. That's very helpful. And maybe kind of starting at a high level here, natural gas supply-demand dynamics. I was wondering if you could walk us through, I guess, your thoughts here. Higher gas prices thought to be better, but it could be too high. It seems like the levels now might not be great for the industry. But just wondering if you could walk us through how you think about it, and where do you see the supply response coming? I imagine at these price levels, everything in the country is economic. So curious for your thoughts there.

Sure. Yes. We've always thought about demand being the key driver to our business on the natural gas strategy that we have. And so that's why we've always talked about the sensitivity to natural gas prices and what that can do to demand destruction. And so there is definitely a sweet spot there where the natural gas pricing can drive out, at least in the long term, some demand. I think in the short term, we're not seeing really any demand destruction at all in regard to natural gas. The coal-to-gas switching situation in the U.S. The coal really isn't responding to the power prices increasing. We're still seeing significant demand for natural gas in regard to power generation. So the seemingly thought about high natural gas prices impacting power generation, it's just not materializing as you might expect. And so I would like to see some moderation in natural gas prices, certainly. Because on the long term, we think that does have the ability to create a demand destruction situation, at least in the U.S. I'm not sure about the LNG opportunities. It seems like the appetite for LNG worldwide is going to continue to grow. And I think the pricing there will respond to that, meaning that -- look at the LNG prices today, and I think I would like to see some moderation there as well because alternatives will continue to creep in if you see LNG prices as high as they are. You'll see more countries pivoting to more coal. And I think that is a situation that we don't want to see worldwide from an emission standpoint as well as the opportunities we see for LNG leaving the U.S. shores. So I'd say we're concerned. Obviously, when we see natural gas prices getting as high as they were, the $8, $9 range, I do believe that's probably a short-term situation. You're going to see a supply response to that. But so far, we've seen a lot of discipline amongst our producer customers, and they're really sticking to their story that they laid out at the beginning of the year where they were going to go in a maintenance mode. And for us, we've been projecting a slight increase in production volumes on our gathering systems this year because we had a significant increase over the last several years. So we got to a plateau where our producers are now going back in. And we're catching up with expansions to catch up with them. We have a number of expansions in our producing areas underway that will really come online next year to see some new trajectory of growth volumes. So I would say maintenance mode looked pretty reasonable to beginning of the year. Prices have responded significantly to supply deficits. And I would say the response that we're seeing from producers still seems to be disciplined. And I think some of that's really driven by services. There's a lot of service challenges on the production side, a lot of fracking challenges, people challenges, sand, trucking challenges. So I would just say they're being careful in -- if the crews aren't there, the crews aren't there. And so I think that's one of the reasons why we're seeing some challenges out there on the producing area.

That's helpful. That makes sense. At these price levels, it seems like everything in the country is economic. You could bring back the Granite Wash or the Mississippian Lime at these levels, everything works. But it seems like the OFS bottlenecks are really the key issue here. So wondering when you see, I guess, the industry kind of working through that. Is it more of a '23 situation at this point? But what, I guess, we're most interested in is where does Williams have latent operating capacity where volumes come and really drops to the bottom line?

Yes. I think on your first point on the oilfield services and certainly, I think the producers are probably more adept to speaking about this, but what we see there is there's been a workforce challenge there. People have a boom-and-bust cycle. And when people get laid off from those jobs, when we had the downturn due to COVID, you saw a lot of people lose their jobs. And I think there's some skittish workforce situations out there. And that's a challenge for the producers. And we don't see that obviously in our business. It's pretty steady in our business, but we do see that on workforce side. So I think in order to attract more people back into this business, they're going to have to see some certainty and opportunity there. And I think as we continue to have these supply challenges, we're going to see some longer-term opportunities for the workforce there. So I'm optimistic, I guess, about workforce coming back into the industry on the production side. I would say, for us, we see a lot of latent capacity in couple of areas. Now our legacy Haynesville position that we had prior to the Trace acquisition, we're full there. So we have a couple of expansions underway. One will come online this summer, then we'll have another one in 2023. The Trace acquisition we made, we have a lot of capacity available there. So our position in the Haynesville went from about 1.8 Bcf a day of capacity to over 4 Bcf of capacity today. And certainly, the Trace system has been built up nicely. Not a lot of additional capital is needed there to increase volumes to that system. So we're encouraged by what we acquired there and continue to pursue opportunities on the fringes of that system. The Northeast, we still see some opportunities to fill some of our systems, but we have several expansions underway in the Northeast, as I said earlier. So those likely will come online in early to late 2023, depending on the system. But there are areas where we are able to move additional volumes through capacity like in our Blue Racer system. So right now, we have a project underway to connect our Utica East Ohio Midstream business to the Blue Racer system. As you probably know, we own 65% of UEOM with our partner, the Canadian Pension Plan. We are a 50% owner in Blue Racer and First Reserve is our partner there. And so we have the opportunity to move volumes between those 2 systems and take advantage of capacity when it becomes available. Right now, our UEO systems are very full. And so we see that opportunity coming very soon to move volumes over to Blue Racer system where they have some capacity available.

Got it. That's very helpful. And sticking with the Haynesville a bit more here, it seems like there's a lot of activity there, potentially a lot of growth. Just wondering how you think about that developing basis -- the outlook for basis there? And how does LEG compete, I guess, versus others? It seems like there's a few projects? Is there room for all of them? Or any thoughts along those lines?

Yes, there's a lot of activity in the Haynesville right now, on the gathering side as well as the takeaway lines that are being evaluated there. Our LEG project, we are in the final phases of buttoning up all of our contracts there and anticipate an FID on that project very soon. So we're very encouraged by what we see there. If you recall, the LEG project, it's about 1.8 Bcf a day gathering pipeline trunkline system that would basically traverse through our Haynesville acreage and it would come down to the Transco pipeline area in the Gillis point in Louisiana. So we are very close to FIDing that project and very encouraged by what we see there. I would say it's definitely a challenging environment right now. There is a lot of competition, but we do believe building out the LEG project will eliminate any basis risks that we see for our production there with our partner, GeoSouthern in that South Mansfield area as well as our customers on our gathering system. So we're definitely looking out for them. We market a lot of gas actually for our customers in the Haynesville, some of our smaller customers. Sequent does market that natural gas as well as they the market all of the gas coming off our GeoSouthern partnership.

Got it. That's very helpful. And just want to turn towards Transco, and there's a plethora of projects, expansions there, make sure I got them all from...

We're keeping FERC very busy on the Transco opportunities.

Texas, Louisiana Energy Pathway; Commonwealth Energy Connector; Southside Reliability Enhancements; Southeast Energy Connector, all these projects. How do you feel about these projects right now in development? The FERC had proposed something that would have made everything much more difficult and then kind of walked it back. And so I guess, curious how you feel about project development and time lines that you've set out there?

Yes, I do feel really good about the projects that we have either in front of FERC or that will be coming there. As you say, FERC did come out with a policy statement that was fairly difficult to understand, first of all. And obviously, they got a lot of backlash not only from industry but really from bipartisan elected officials and very quickly pulled that back. We had a number of conversations with FERC commissioners one-on-one, trying to understand what their intentions were. And I think they had good intentions. They certainly are looking to protect the environment as best they can and as best they think they've been told to do by the courts. But I do think we are seeing a bit more same reaction here now from the FERC as they've pulled back this policy statement and reevaluating where they're at. Having said all that, I felt very comfortable that on either the policy statement that they issued or what is coming, we will be able to develop projects under the regime that they are intending to go forward with. Our team does a really good job of evaluating the environmental impacts of these projects. We've been portraying our emissions to FERC for quite some time now and giving them the information that they've asked for, so that they can properly evaluate these projects. So we feel really good about where we're at in regard to our projects. The bulk of our projects do have some kind of emissions reduction opportunity, and it's very interesting that we have the vintage Transco system that we're working with. And what we do is we try to go in and evaluate a project from an emission standpoint and look at the vintage compression that's associated with the existing assets, and we're building these brownfield projects. We go in and we configure the new compression to move the additional volumes, but we also are replacing the older compression alongside that at existing stations. And so that reduces the emission profile of those vintage, brownfield emissions dramatically. And it's primarily a NOx emissions issue, but we also have significant greenhouse gas equivalent admissions in that regard as well. So we're taking advantage of the growth projects and reducing the emissions of our existing operations at the same time. So I'll run down a couple of the projects, and I'll try to run them all down as you expressed the whole list of projects there. But regional energy access is the big one that we have in front of FERC right now. So we're awaiting their approval. We've got a draft EIS in hand, very comfortable with the draft EIS requirements that were embedded in that. We expect the final EIS in July for that project. And then by the fall, we would expect action from the FERC line certificate approval. And so that's a 800,000-a-day plus project from a volume standpoint. Moving Northeast gas volumes into markets in the Northeast, New Jersey primarily, in Maryland and a small amount into New York City. But really comfortable with the configuration of that project. The primary permits are required in Pennsylvania. We're currently processing those permit applications. And we have a really good relationship with the State of Pennsylvania, have had no trouble and no challenges permitting our projects there. No water permits required in New Jersey or New York for that project. And so we think that will be a very comfortable permitting process there. So that's our big one that we have in front of FERC. The Southside Reliability Enhancement project is also one that we just made our application in May. This is about a 420,000 dekatherm a day project that would likely come online in 2024. And that one, as I said, we filed in May. We have several others that are in prefiling right now. We have the Commonwealth Energy Connector as well as the Southside Energy Connector, 2 projects, all told, that's about 250,000 more dekatherms in the Southeast U.S. as well as in Mid-Atlantic. And then finally, our Texas to Louisiana Energy Pathway Project. This is a South Texas supply push project, bringing gas to the LNG facilities along the Gulf Coast. That one will enter prefiling very shortly. So a lot of activity going on in the Transco system. As you can see, we are very comfortable with the FERC process and the challenges associated with that. Our team has done an incredible job permitting and executing on projects. We've had a number of projects come online over the last several years, bringing those online early and under budget. And finally, we do have an expansion underway on Gulfstream. So that's our partnership that we have with Enbridge. That's the pipeline that goes from Mobile, Alabama into the Tampa Bay area in Florida, and that's a small project that come online in third quarter of this year.

Got it. That's very helpful. And so you touched on it a little bit there, but I want to go to LNG. It seems like Williams is well positioned to help facilitate movements of molecules to the LNG export facilities. But would you be interested as well as taking a stake in an LNG such as projects such as leveraging the GeoSouthern production in Haynesville and kind of maybe leveraging that into an equity stake in a new project? Or any thoughts on LNG ownership?

Yes. I would say our strategy has been to be the pipeline supplier for the LNG facilities as best we can. So we've worked with a number of those LNG facilities along the Gulf Coast as well as the East Coast. So we deliver volumes into the Transco system that ultimately end up at Cove Point and Elba, but significant pipeline provider to the Gulf Coast facilities as well. So we've really taken that strategy as our opportunity to help supply the LNG facilities. And I would say for Williams, our balance sheet challenges were there for a number of years where we had a pretty disciplined approach to our capital investments. And as you all know, these LNG facilities require a significant amount of upfront capital before you see revenue any from those. And so I think that's one of the areas that we've looked at, where we thought we're better suited right now to be the supplier -- pipeline supplier to these facilities. And I'm not saying that we wouldn't consider that. But right now, our business development team is looking at opportunities there, but we think we're best suited to being the pipeline supplier to them. But never say never in that regard. There are certainly additional opportunities for LNG facilities to be built in the U.S. And Williams will certainly looking at that now that we have our balance sheet in really good shape.

Got it. That's helpful. And then pivoting towards Appalachia a bit here. MVP is kind of a key variable, I guess, for the future of what happens for production there. Just wondering how this impacts Williams, if it does get reach completion, if it doesn't reach completion, how would you handicap completion?

Sure. Well, I would say, first and foremost, I hope Mountain Valley Pipeline gets finished. I think it's good for the industry. That pipeline project is allowed to finish. It's nearly complete. And for us, there's opportunities either way. The Transco system can be expanded once Mountain Valley Pipeline has a concluding point. It really stops right at Station 165 on the Transco system, and we will create opportunities taking away that supply from that area. But if Mountain Valley Pipeline is not finished, we think there are definitely opportunities to continue to build out Transco. And we're actually looking at projects to do that today, for those that are concerned that Mountain Valley Pipeline may not be finished. And obviously, they're more expensive than a takeaway project with a completed Mountain Valley Pipeline, but we do think there will be opportunities for Transco either way. And time will tell whether Mountain Valley Pipeline ultimately gets approvals to go forward. But I am very optimistic that certainly, in this environment right now, they'll be allowed to complete.

Got it. That makes sense. And diving into Appalachia a little bit more, I think there's a couple of gathering systems and some other initiatives that Williams is working on there. Can you just walk us through, I guess, what's happening there? And is production in Appalachia right now effectively capped? And how does that impact you?

Yes. I would say there's still takeaway out of Appalachia, primarily going to the west out of the Ohio Southwest Pennsylvania, West Virginia area. Very challenged, fairly challenged, I should say, going to the Northeast as we all know. But our Regional Energy Access project will alleviate some of that. So that's coming out of Northeast Pennsylvania. So we'll unlock another 800,000 dekatherms out of Northeast Pennsylvania, our Leidy South project came online last year that unlocked additional volumes out of Pennsylvania, that was over 500,000 dekatherms. So we're continuing to find these bolt-on opportunities to move natural gas out of the Appalachia area. And I think we'll continue to find opportunities to do that. It doesn't necessarily mean you have to build a greenfield [ bullet ] pipeline out of there. And I think we and the rest of the industry continue to find these brownfield expansion opportunities to do that. I would say right now, as I said earlier, we've got a number of expansions underway in our Appalachia gathering systems. We have over 300,000 dekatherm a day expansion underway for Coterra in Northeast Pennsylvania that will come online in 2023. We have about 100,000 dekatherm a day expansion underway in the Southwest Marcellus for another key customer there that will come online in '23, that's in the rich gas area. And then a number of expansions underway for Encino, who is a private operator backed by the Canadian Pension Plan. This is also in the rich areas in Ohio. And then finally, the Blue Racer interconnect that I spoke about earlier we expect that to come online here this summer.

Got it. That's helpful. And I'd be remiss if I didn't ask about capital allocation, something that's always -- has been topical in recent years for this space. And between buybacks, deleveraging and CapEx, how you think about priorities here, Williams had previously talked about the bond spread versus the equity spread being a factor in repurchases. And so it seems like share repurchase is probably not something we should really expect in the near term, but just wondering if you could walk us through that.

Sure. Yes, I'll start at the top there. And you've heard me mention balance sheet a number of times. And that's really the most important thing for us right now, is to maintain our healthy balance sheet. We've really worked hard to get there. That was a goal that we established several years ago to dramatically improve our position there, and we have a target to be at 3.8x debt to EBITDA by this year in our guidance and certainly expect to be able to hit that. So that's, first and foremost, our main priority in regard to our capital allocation decisions. So next is our dividend and making sure that we have a healthy dividend, and we continue to grow that in line with our EBITDA growth. And so you'll continue to see that happen. Next is our capital investment opportunities. We have a significant number of capital investment opportunities, but we really guided to be about $1.2 billion per year in growth capital. And that will be a little bit lumpy, but on average, that's where we expect to be over the next several years depending upon the opportunities that show up like Trace, where we added an opportunity to acquire that. So keeping our balance sheet healthy is important for us to be able to take advantage of opportunities similar to that. And then we've got our modernization and our emissions reduction program as well that we've talked about, we think we can deploy $200 million to $300 million per year there on the emissions reduction program as well as our New Energy Ventures organization where we think there's significant opportunities that are under development there. But really, the primary capital investments we're making there are the solar projects that we have underway and very likely, we'll push most of those into 2023. It looks like right now, based on what we're seeing with panel prices and the tariff dust up that's been going on, the opportunity to acquire panels is pretty difficult right now with the supply chain issues. So very likely we'll push some of those out, although we've installed some small projects thus far this year. And then finally, the buyback question is certainly out there. But really for us, it's keeping our options open in that last tranche of opportunity. So if we do see a pullback in our price such that the yield spread there between our equity and our debt costs, we'll take a look at that and take advantage of that. But I would just say the top priorities I listed there are really what we're focused on from the top down.

Got it. That makes sense. And you touched on Energy Ventures there a little bit and just wanted to pick up, I guess, what you -- what do you see is possible in -- through your lens there? RNG, carbon capture, hydrogen, other, how would you rank, I guess, what could be real near-term opportunities versus we'll see?

Well, renewable natural gas is certainly something we've been chasing, although it's a small piece of our business, to be very clear. We have about 12 million to 13 million cubic feet per day that comes into our system from either landfills or dairies. So it's a very small component of our gathering volumes today. Our gathering systems capacity is about 24 Bcf. So a very small piece of the business. But we are looking at a lot of opportunities to go out and invest in some of these opportunities where we would actually go and gather some of this, either landfill or dairy gas, but really nothing coming to the forefront there yet, but it's pretty small investments in that regard. Hydrogen is something else that we're looking at. We're looking at some pilot projects with some of our customers there that are willing to pay for these things. But hydrogen at scale does not make sense today. It's just not economic in comparison to natural gas. Even with natural gas at $9, hydrogen is still not economic. But there are customers that are willing to venture into this with us, and they would like to see some of that hydrogen placed into our systems such that they can take credit for that hydrogen coming into their local distribution companies. And so we're looking at some small pilot projects there. But we have a lot of people studying that, but for us, it just doesn't look economic today. Carbon capture is another area where we have a team looking at a number of significant opportunities there. I think the Haynesville area is an area that would be very ripe for this. There's a lot of CO2 that's removed from the gas streams today that we and all the other gathering and processing systems in the Haynesville play do today. So we basically pull that CO2 out to our amine treating systems and vent the majority of that to atmosphere today. So it's already aggregated in many of these areas. And so there is definitely an opportunity to gather that CO2 and take it to a sequestration point. And so we are definitely evaluating opportunities there, especially in conjunction with our LEG project. And so more to come on that, but I do think there will be opportunities for us there. And then finally, we are looking at Decarbonization-as-a-Service with ContextLabs. That's an entity that we partnered with to look at evaluating the emissions profile of our business. So it's starting with the upstream, through the midstream, all the way to the end user. And you may have seen an announcement that Cheniere and ourselves, made -- along with another -- a lot of other midstream operators a few months ago, talking about doing this very thing. And so making sure that we're being responsible, tracking those emissions, people to quantify those, measure those, report on those and have verification of those emissions really important today. And so we're really working hard to find additional opportunities to do that with our business.

Got it. That's helpful. And I didn't want to miss the Gulf of Mexico. It seems like there's some activity there, some -- a few new projects. Just wondering if you could update us on that. And it seems like Gulf of Mexico projects have the ability to be very low in capital given the system there. So can you touch on that?

We do have a lot of opportunity in the Gulf of Mexico, and there's actually a lot of activity going on out there, and we're very well suited to capture that. If you look at our materials, we have about 6 projects that are very large that are underway right now. The Whale project with Shell and Chevron is the biggest, it's under $500 million of capital investment for us at a very nice return. That's a pipeline system that we build as well as onshore processing for the benefit of the producers there. And so we actually will start installing that pipeline system this fall, and very likely, we'll have volumes coming online in 2024 for that project. So that's the biggest one. We also have a number of projects on our Discovery system, our partnership with DCP in the middle part of the Gulf of Mexico there. And on the Eastern Gulf, we have a number of projects underway there. But the bulk of them are the Ballymore project, Anchor project, Salamanca, Shenandoah. Shenandoah does have about a $200 million capital investment opportunity for us there. But the bulk of these remaining projects are tiebacks that the producers are spending the capital to bring the pipelines to our systems.

Got it. That's really helpful. I think we're down to our last couple of minutes here. And so I didn't know if there's any kind of final thoughts that you want to share with the audience.

Well, I would just say the Williams business is performing incredibly well. Our team is doing a great job finding new growth opportunities, but they're also doing an excellent job operating the existing business. Our teams are incredibly focused on being a safe, reliable operator. We track all of our safety and reliability metrics and actually portray those to our customers and make sure they understand what we're doing for them. It is incredibly important for our industry to be a great operator, and Williams prides itself on doing that. We all have to do our part to make sure that this industry is doing everything we can to operate our businesses well, because there is a target on our back. You've probably seen the information out there where we're being monitored from satellites in space for methane emissions. And I think that's actually a good thing. I have no problem with that whatsoever because I think that makes all of us better operators. Whenever somebody shines a spotlight on a situation that occurred, I think that makes all of us better at what we do because we know we're being observed. I think Williams has been doing this the right way for a long time. We've been monitoring. We've been doing leak detection. We've been these things and not talking a lot about them, but doing them. And our sustainability report will be coming out here in a few weeks and encourage all of you to read that. You can see all the great things that we're doing in this space.

Great. With that, I think we're just about right on time to finish. So thank you, everyone, for joining us. Thank you, Micheal, for...

Thank you for your time.