The Williams Companies, Inc. (NYSE:WMB) Q1 2023 Earnings Call Transcript May 4, 2023

The Williams Companies, Inc. beats earnings expectations. Reported EPS is $0.76, expectations were $0.46.

Operator: Good day, everyone and welcome to the Williams First Quarter 2023 Earnings Conference Call. Today’s conference is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Mr. Danilo Juvane, Vice President of Investor Relations and ESG. Please go ahead.

Danilo Juvane: Thanks, Abby and good morning everyone. Thank you for joining us and for your interest in The Williams Companies. Yesterday afternoon, we have released our earnings press release and the presentation that our President and CEO, Alan Armstrong and the Chief Financial Officer, John Porter, will speak to this morning. Also joining us on the call today are Michael Dunn, our Chief Operating Officer; Lane Wilson, our General Counsel; and Chad Zamarin, our Executive Vice President of Corporate Strategic Development. In our presentation materials, you will find a disclaimer related to forward-looking statements. This disclaimer is important and integral to our remarks and you should review it. Also included in the presentation materials are non-GAAP measures that we reconcile to generally accepted accounting principles. And these reconciliation schedules appear at the back of today’s presentation materials. So with that, I will turn it over to Alan Armstrong.

Alan Armstrong: Thanks, Danilo and thank you all for joining us today. Our natural gas-focused strategy continues to deliver steady predictable growth and this past year was no exception – sorry, this past quarter was no exception with our adjusted EBITDA, up nearly 20% compared to the first quarter of ‘22. And let me remind you that last year was a record year for growth as well when we were up 14% on an annual basis, so really a big quarter for us on a tough comp. We saw strong performance across all key financial metrics in the first quarter and set new records in our key operational stats as well, once again demonstrating our businesses’ resiliency through commodity price swings. But beyond this obvious financial performance in the headlines, please don’t miss the importance of the accomplishments in this past quarter that will serve to produce growth in ‘24 and beyond.

So let me start out here on Slide 2 by highlighting a few of these accomplishments that will continue to drive what has now been over 10 years of consistent year-over-year EBITDA growth. First, we closed the acquisition of the MountainWest Natural Gas Transmission and Storage business, well ahead of our expectations. This acquisition enhances our position in the Western U.S. and expands our services to key Rockies markets. We are really happy with how the integration of MountainWest and The Williams has been progressing since we closed in February. And in fact, we are already seeing several expansion opportunities that were not in our pro forma, proving this asset is best positioned to be optimized within The Williams platform. Our team also accelerated the timing on key deliverables for several other fixed fee-based projects that are all supported by long-term contracts.

This includes our Louisiana Energy Gateway project, Transco’s Southeast Energy Connector and Transco’s Regional Energy Access project. In fact, project execution is now in full swing on both Regional Energy Access and Louisiana Energy Gateway. And as a result of the quick action by the FERC and our construction teams, we now expect to bring approximately half of this regional energy access capacity into service ahead of schedule and actually in the fourth quarter of this year. So, that will be just in time to meet growing demand in the Northeast region ahead of the winter heating season. Of course, this will also provide new market for producers on our Northeast Pennsylvania gathering systems, which of course is incremental to the returns on a project like that.

We also executed several key agreements with Chevron to facilitate natural gas production growth in the Haynesville and the deepwater Gulf of Mexico. As part of those agreements, we gained a large dedication to our recently acquired Trace gathering system and a long-term capacity commitment on our Louisiana Energy Gateway project. This is a great example of Williams and Chevron working together to connect prolific domestic resources to expanding LNG export markets. We also placed several large-scale gathering expansion into service this quarter. The Marcellus South gathering expansion in Southwest Appalachia increased our capacity by 100 million cubic feet per day from rich gas supplies in this area and significant progress was also made on our build-out of the new and fully contracted capacity on our Susquehanna County gathering system in Northeast PA.

We also added 100 million cubic feet per day of capacity this quarter as part of the second phase of our Haynesville Spring Ridge expansion. And we saw first flow for the Taggart expansion project in the deepwater Gulf of Mexico across our Devils Tower platform. Importantly, this is the first of five significant expansion projects that are expected to come online over the next 2 years and that will ultimately double our Gulf of Mexico earnings contributions. Finally, I will add that we are moving forward on a number of projects in our backlog and our visibility to growth on the transmission side of the business is as good as we have seen it. From a financial perspective, the strength of our assets across all areas is reflected in our solid first quarter results and in fact, our base business produced record contracted transmission capacity and record gathering volumes even after we exclude the contributions from acquisitions.

The one underperforming area was in NGL processing margins, but more about this in a moment. Importantly, this was a quarter in which we saw Sequent fully optimized assets in our base business, underscoring the balance and improved commercial competencies that the Sequent acquisition has delivered for the benefit of our natural gas strategy. So for example, in the Northeast, we benefited from record gathering volumes and significantly outperformed the broader Marcellus production trends as Sequent provided takeaway markets uniquely for our producing customers in Ohio. In the transmission and Gulf of Mexico segment, we realized higher short-term firm sales on our pipes as Sequent helped to commercialize more business in that area as well and now back to the big variance in our processing margins.

In the West, our NGL processing margins on the legacy Williams business were actually negative due to abnormally high natural gas prices at Opal and really throughout everything west of Opal. Normally, this would have shown up as a significant negative issue for the quarter. However, Sequent was able to capitalize on these large natural gas basis spreads in the West and more than offset the negative NGL margins turning this volatility into a net positive for Williams. Our acquisitions continue to deliver as expected proving that our capital allocation strategy to fund these transactions with excess Sequent and E&P cash flows is setting us up for continued reliable and predictable earnings growth. I’d also note that as the market continues to underappreciate and undervalue the strength and resilience of our business, we stand ready to utilize our repurchase program as we did during this first quarter.

So overall, a great quarter that has us set up for growth in ‘24 and beyond. And with that, John will walk us through the financial metrics for the quarter. John?

John Porter: Thanks, Alan. Starting here on Slide 4 with a summary of our year-over-year financial performance, beginning with adjusted EBITDA, we saw a 19% year-over-year increase. As we will see on the next slide, our adjusted EBITDA growth included growth of over $100 million from our core large-scale natural gas transmission and gathering and processing businesses, including new records for both gathering and contracted transmission capacity. But it also included strong performance from our Sequent gas marketing business, which dramatically overcame a perfect storm of severe winter weather impacts on our Wyoming businesses. Those Wyoming impacts included hits to both upstream and gathering and processing volumes as well as our Southwest Wyoming gas processing margins which were much lower from a surge in January shrink replacement gas price.

Our adjusted EPS increased 37% for the quarter, continuing the strong growth we have had in EPS over the last many years. Available funds from operations, AFFO growth was even better than adjusted EBITDA at 22% year-over-year. Also, you see our dividend coverage based on AFFO was a very strong 2.65x on a dividend that grew 5.3% over the prior year. Our balance sheet continues to strengthen with debt to adjusted EBITDA now reaching 3.57x versus last year’s 3.81x. And that’s even after closing the trade, NorTex and MountainWest acquisitions and also repurchasing $83 million of shares since last year. On growth CapEx, you see an increase over first quarter last year primarily reflecting the progress we are making on some of our key growth projects, including Regional Energy Access and Louisiana Energy Gateway.

So before we move to the next slide and dig a little deeper into our adjusted EBITDA results for the quarter, we will provide a few updates to our 2023 financial guidance. No change to our consolidated adjusted EBITDA guidance of $6.4 billion to $6.8 billion or any of our other consolidated financial performance metrics. Looking further into the year, our core transmission and gathering and processing businesses should see some additional growth from the first quarter level. For transmission in Gulf of Mexico, we will see some ramp from a full quarter of MountainWest Pipeline and some other smaller sequential improvements through the rest of the year that should allow for a strong finish to the year. In the Northeast, we are expecting a modest increase towards the end of the year from the first quarter EBITDA level, primarily from our higher margin liquids-rich systems.

Overall though, we are not counting on a lot of additional growth in the Northeast from this $470 million first quarter level, which was up 12% over the prior year. In the West, we are expecting some modest increases through the remainder of the year from the $286 million first quarter level, especially reflecting improvement from some of the challenges we saw in the first quarter, which we will discuss further on the next slide. For the marketing business, we have had a strong overall start to 2023. And importantly, hitting the midpoint of our guidance doesn’t rely on any additional EBITDA from Sequent at this point. With respect to the upstream joint venture EBITDA guidance, it’s been a tough start to our Wyoming operation with the extremely difficult winter weather that significantly impacted producing volume and our drilling plans.

So we see this business likely trending towards the lower half of the $230 million to $430 million guidance range. But to be clear, for our consolidated adjusted EBITDA, we are still focused on hitting at least the midpoint of our guidance range at $6.6 billion. We are increasing our growth CapEx by $200 million to reflect the acceleration of our largest Transco project, Regional Energy Access, which we hope to bring into partial service later this year, early partial in-service for regional energy access won’t have a huge impact on 2023 and is really just upside to our hitting the midpoint of our guidance for EBITDA. So, let’s turn to the next slide and take a little closer look at the first quarter results. Again, the first quarter matched our expectations for a very strong start to the year with 19% growth over the prior year.

Walking now from last year’s $1.512 billion to this year’s record $1.795 billion, we start with our upstream joint venture operations that are included in our other segment, which were up only $3 million over last year. Our Haynesville upstream EBITDA was up about $32 million as there was really very little production in the first quarter of last year. However, the Haynesville increase was offset by lower Wamsutter results due primarily to the historically difficult winter weather we saw in Wyoming this year. In fact, we estimate overall weather-impacted volumes during the first quarter were probably about 3.5x what we normally expect. And of course that impact flowed through to our Wamsutter gathering and processing assets as well. Shifting now to our core business performance, our transmission in Gulf of Mexico business improved $31 million or 4% due primarily from the partial contribution from the MountainWest Pipeline acquisition, which closed on February 14 and a full quarter from the NorTex acquisition.

Our Northeast Gathering and Processing business performed very well with a $52 million or 12% increase driven by $73 million increase in service revenue. This revenue increase was fueled by 7% increase in total volumes in the Northeast focused in our liquids-rich areas, where we tend to have higher per unit margins than our dry gas areas. And in the appendix, you will find a slide that compares our 7% volume growth to the overall basin growth of just under 2%. Shifting now to the West, which increased $26 million or 10%, benefiting from positive hedge results and a full quarter of the Trace acquisition, but the West was significantly unfavorably impacted by the severe Wyoming weather and January processing economics at our Opal Wyoming processing plants.

Overall, gas processing margins were $44 million lower this year than last and that was largely a January phenomenon. All in, the West was about 3% short of our plan, although the winter weather impact was much worse than we had planned. And then you see the $165 million increase in our gas and NGL marketing business. And at our Analyst Day, we did point to a strong start to the year for this business due to the economics that we saw around our year end Sequent transportation and storage positions. Ultimately, the $231 million for gas marketing was driven by positive transportation margins across all regions and strong storage margins that benefited from the lower cost or market write-down we discussed in the fourth quarter review. So again, a strong start to 2023 with 19% growth in EBITDA, driven by core infrastructure business performance with strength from our marketing business that dramatically overcame weaker-than-expected results from the upstream joint ventures.

And with that, I will turn it back to Alan.

Alan Armstrong: Great. Well, thanks, John. And so, now just a few closing remarks before we turn it over to your questions. First, I will start by reiterating our belief that Williams remains a compelling investment opportunity. We are the most natural gas-centric large-scale midstream company around today and the integrated nature of our business from our best-in-class long-haul pipes to our formidable gathering assets and our value-driving Sequent platform is unique. Our combination of proven resilience, a 5-year EPS CAGR of 23%, coverage that is now approaching 3x on our high growth dividend, a strong balance sheet and high visibility to growth is unique amongst the S&P 500 and unique within our sector. I will add that there is a reason we have stuck with our natural gas-focused strategy for as long as we have.

This strategy allowed us to produce a 10-year track record of growing adjusted EBITDA through a large number of commodity and economic cycles and is continuing to deliver significant growth in the current environment, but the signals coming from the market show that it is going to continue to deliver substantial growth for the long-term as well. Natural gas demand continues to build, and the recent low prices actually will drive even more growth in demand over the long-term as the combination of low price, low emissions and energy security is exactly what the world will need more of. U.S. natural gas infrastructure is key to meeting both today’s energy demand as well as projected growth of electrification and renewables build out in the future.

Natural gas is the solution for the most complex challenge of our time, producing affordable and reliable energy while meeting our climate goals and the United States is positioned better than any other country on this front. But access to our abundant and low cost natural gas reserves is dependent on having the appropriate infrastructure to move energy when and where it is needed and we are seeing and feeling today the impacts of inadequate infrastructure with consumers bearing the brunt of these actions in the form of high utility bills, unnecessary blackouts and energy-driven inflation. The good news is that we have a solution that is readily available, a solution that will support global emission reductions, keep energy cost affordable and grow our nation’s competitiveness.

Enabling this efficient, unobstructed build-out of our nation’s energy infrastructure to ensure delivery of natural gas is foundational to the U.S.’ leadership on greenhouse gas emission reduction and energy security. And we at Williams will proudly continue our efforts to strongly advocate for actionable energy policy solutions and permitting reform in the days and months ahead. So with that, I will open it up for your questions.

Q&A Session

Operator: [Operator Instructions] Your first question comes from the line of Brian Reynolds from UBS. Your line is open.

Operator: Your next question comes from the line of Jeremy Tonet from JP Morgan. Your line is open.

Operator: Your next question comes from the line of Marc Solecitto from Barclays. Your line is open.

Operator: Your next question comes from the line of Praneeth Satish from Wells Fargo. Your line is open.

Operator: Your next question comes from the line of Gabe Moreen from Mizuho. Your line is open.

Operator: Thank you. Your next question comes from the line of Neal Dingmann from Truist Securities. Your line is open.

Operator: Your next question comes from the line of Brandon Joe from Scotiabank. Your line is open.

Operator: Your next question comes from the line of Spiro Dounis from Citi. Your line is open.

Operator: Your next question comes from the line of Sunil Sibal from Seaport Global. Your line is open.

Operator: Your final question comes from the line of Jean Ann Salisbury from Bernstein. Your line is open.

Operator: There are no further questions at this time. Mr. Alan Armstrong, President and Chief Executive Officer, I will turn the call back over to you.

Alan Armstrong: Great. Thank you. Well, we are really as a team, I tell you, we are really excited to deliver the quarter that we just delivered, particularly within commodity cycle that we are in and really excited about how we are set up for the future and some of the great accomplishments that team delivered this quarter as well. So, we look forward to rewarding our shareholders with more growth in the future and are very well positioned for that. So, thank you for joining us today and look forward to talking to you in the future.

Operator: This concludes today’s conference call. You may now disconnect.