Friday, July 3, 2020

US Pipeline Companies: Part #2

Williams Companies

Their business: Mostly Natural gas, they break down their segments by geographic region:
  • West: Gas gathering, processing and treating in several Western US shale oil fields.  27% of 2019 EBIDTA.
  • Northeast G&P: Gas gathering, processing and fractionalising in the Appalachians.  30% of 2019 EBIDTA.
  • Transmission and GOM: Transport along their Transco pipeline, with a little gas/oil gathering in GOM.  42% of 2019 EBIDTA.
Transco is irreplaceable - more than one fifth of US natural gas consumption flows through it.  for Northeast G&P, Morningstar estimates that Williams collects about a third of overall gas volumes across the Appalachian region.  Their other assets are more exposed to market forces, especially declining crude.

West could be badly affected by crude oil shut-ins, as 30-40% of US natural gas production is associated with crude oil (the gas is an unwanted by product).  Northeast G&P would not be affected  and may even benefit if gas prices rise due to a falls in associated gas.  Transco would likewise be unaffected or benefit.  I believe more than half of GOM's natural gas production is associated with oil wells, so they may be hit too.

Leverage: 2019 debt was 5.4 times EBIDTA.  Very high.  They aim to reduce it to 4.2 times.

For operating leverage, 2019 CFO was 40% of revenue (excluding product sales).  ie: Service revenue would have to fall by this much before they start losing cash.

Valuation: Trading at a 7% trailing yield, with CFO at 1.8 times their dividend.

Growth: Still growing.  Capex in 2018 was 4.2bn, 2019 was 2.4bn, 2020 is expected to be 1.5bn.  For comparison, 2019's CFO was 3.6bn.  They have not announced further cutbacks to 2020 capex.

Near term they have earmarked 3.2bn:

Longer term they have other opportunities:

Management recently said they expect to have "positive free cashflow" from now.  Specifically: without any asset sales, their operating cashflows should support both their capex and dividends.

Long term or political risks: Don't see any.  Natural gas is environmentally clean and has low carbon emissions.  Oh wait...all fossil fuels are bad - one of their proposed pipelines was just killed by NY.

Worst case scenario:  Again, lets say US crude production halves. I'm going to assume that all gas production in their 'West' segment is associated with oil (1) (2).  So if gas production halves, revenue halves, and the company's CFO drops by 900m or 25%, to 2.8bn.  After the projected capex, they would have to cut their 2020 dividends to ~ $1.05,

Kinder Morgan

Their business: Mostly Natural gas:
  • Natural Gas: interstate and intrastate natural gas pipeline and storage systems, gathering, NGL fractionation, and LNG liquefaction & storage.  57% of EBDA.
  • Refined Pipelines: pipelines that deliver refined product, and some crude.  Including some terminals and mixing facilities.  15% of EBDA.
  • Terminals: Terminals, and Jones-Act qualified tankers.  18% of EBDA.
  • CO2: produces, transports and sells CO2, used for crude oil production.  8% of EBDA
KMI owns the Tennessee gas pipeline, one of three large interstate pipelines supplying Eastern US natural gas.  The company says that 40% of US gas passes through its pipelines.  They would be considered irreplaceable,

CO2 would be badly affected by crude oil demand, while natural gas gathering would be affected by oil production.  Refined pipelines would be affected by covid.

Leverage: 2019 debt was 4.8 times EBIDTA.  Pretty high.

For operating leverage, 2019 CFO was 60% of revenue (excluding product sales).  ie: Service revenue would have to fall by that much before they start losing cash.

Valuation: Trading at a 7% trailing yield, with 2019 CFO at 2.2 times their 2019 dividend.  It would cover the newly raised dividend ($1.05/year) by 2 times.

Growth: Still growing.  They announced they were reducing 2020 capex from around ~3bn to 2.2bn.  For comparison, 2019's CFO was 5bn.

Their new projects before the announced reduction are here (slide 13).  The reduction was probably in CO2:

Long term or political risks: The usual ESG stuff.

Worst case scenario:  Again, lets pessimistically say US crude production halves.  And KMI gets corresponding reductions in revenue as customers go broke.

For Natural Gas, how much would be affected by the halving crude production?  They say that gathering and processing was only 10% of EBDA (slide 21):

I can't relate this to revenues, but assume it cashflows from this fall to zero, as revenue is halved.    Thats an 800m reduction in earnings/cashflows.

For CO2, its easier - halving 2019 revenue subtracts 600m from earnings/cashflows.

So total, we lose 1.4bn from cashflows, which is now 3.6bn.

This gives us enough to cover the 2.2bn capex, but not enough to cover the 2.4bn in dividends - the $1.05 dividend would have to be cut to 60c to be cashflow neutral in 2020.

Lets also say that their refined revenue halves over 2020, due to covid.  This is realistic - not pessimistic - but its only temporary.  KMI's refined revenue also halves, as refined fees are usually volume based.  That removes 900m from their Products revenue, they will still have 500m they could use for dividends, or around 20c per share.


I like Williams and KMI the best, as natural gas is not affected by covid, and is only partially affected by crude.

Although both have high leverage, I can't see any way either company fails.  The dividend is comfortably covered under normal conditions.  And both have growth potential.

KMI has slightly more short-term downside due to more refined exposure.

In general, these types of businesses are predictable and profitable.  Its the black swan risks to watch our for (like Deepwater Horizon).  Or the political ones (Green New Deal).

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