Williams Companies (WMB) has doubled since I bought it in mid-2020. Should I sell it?
Business Segments
What do they do again? And how are they affected by energy prices and inflation?
Based on 1Q24 EBIDTA (slide 8):
- 39%: Interstate Gas Pipelines. Mostly Transco (30%) running through the east coast, bringing gas from the Appalachians and GoM to consumers and LNG export terminals. Smaller pipelines in the Northwest.
Regulated long-term contracts: "The rates are established primarily through the FERC’s ratemaking process, but we also may negotiate rates with our customers pursuant to the terms of our tariffs and FERC policy." In general, FERC gas-transmission rates are often adjusted for cost-of-service (bottom p1), so its like a "delayed" inflation adjustment.
- 38% Gathering and Processing from gas fields. Collecting and treating gas (eg: removing NGLs) from producing fields so it can be transported in pipelines. Mostly volume based. So indirectly affected by price (eg: revenue drops during warm winters). Management mentioned these contracts are often inflation protected (bottom p19). A few of them have exposure to gas prices (bottom p18).
- 13% Gathering and Processing from oil fields: onshore (7%) and GoM (5%)
- 4% Marketing. Deliver gas to customers, bear the risk of price movements in-between the time of order and delivery. Very volatile. Was 10% of EBIDTA in 2023, -ve in 2022, and negligible in 2021.
A 2022 Fitch Report estimated that 50% of revenue was from regulated or take-or-pay contracts. so rough guess: maybe a quarter of their G&P revenue is covered by take-or-pay.
Cashflows
CFO covers dividends. But not always CFI and dividends together. ie: They are investing for expansion:
They rarely sell assets, last made substantial disposals in 2018:
Maintenance capex was 820m in 2023, and is guided at 800m and 1.2b for 2024 and 2025 (p11).
Growth
Growth capex was 1.9bn in 2023, and is expected to be 1.6bn in 2024 and 1.8bn in 2025 (p11).
The above "growth capex" excludes acquisitions of new businesses. Following this, I'll take the words "capex" or "growth capex" in this post to exclude acquisitions, which is pretty strange.
Lets put it in a table. AFFO below is CFO (excluding some working capital changes and minus a few things) - think of it as "Smoothed CFO" 1:
They say they've gotten 19.5% ROIC on their 2019-2022 investments (p12). Seems ridiculously high, but these are usually small "bolt on" projects. e.g.: small pipelines adding off their main lines, adding new takeaway or feeds to new customers. Or adding incremental G&P capacity to their existing network.
And thats probably only for growth capex, as recent acquisitions were bought at 7-10X EBITDA (1), (2).
Overall they aim to grow EBIDTA and dividends by 5-7% in the next 2 years.
The background is growth opportunities from the expected US LNG export boom (slide 16):
Management comments on the urgency of this (p17): "Our issue is that our customers, which are some of our best and biggest customers on Transco are –their demands are very urgent. And for us to sit around and wait to finalize any more of the demand that was pending out there, really, it doesn't serve those customers very well."
To summarise, they are still growing, and taking on debt to afford to both pay dividends and make acquisitions. At some stage of the cycle - years later - that may become a bad thing, but its good today.
Valuation
Taking FCF to be "AFFO minus maintenance capex" 2, it is projected to average 4.2bn over 2023 to 2025. At a share price of $42.5, thats a price to FCF of 12.x. Fairly priced for a long term growth rate of 5-7%.
The yield is 4.5% before tax (or 3.1% after tax for me). AFFO payout ratio is just under half.
Conclusion
Its not cheap anymore - growth is priced in. I wouldn't buy now, but its not clearly overvalued so I'll hold. We're probably still at the beginning of the US natural gas export boom.
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