The Williams Companies, Inc. (NYSE:WMB) Q2 2023 Earnings Call Transcript

The Williams Companies, Inc. (NYSE:WMB) Q2 2023 Earnings Call Transcript August 3, 2023

Operator: Good day, everyone, and welcome to The Williams Second Quarter 2023 Earnings Conference Call. Just a reminder, today’s call is being recorded. And now 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, ESG, and Investment Analysis. Please go ahead, sir.

Danilo Juvane: Thanks, Bo, and good morning, everyone. Thank you for joining us and for your interest in The Williams Companies. Yesterday afternoon, we’ve released our earnings press release and the presentation that our President and CEO, Alan Armstrong and our 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.

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Alan Armstrong: Okay. Well, thanks, Danilo, and thank you all for joining us today another positive story to share with you this quarter, and you can see some of those highlighted here and called out on Slide 2. First of all, adjusted EBITDA up 8%, adjusted earnings per share up 5%, and our gathering volumes were up 6%. And certainly, while this growth and beat is impressive, our resiliency in the face of low commodity prices is even more impressive and gave us another opportunity to distinguish ourselves from the pack, which is largely post to declines this quarter. And our growth continues to compound despite these price swings in natural gas. This quarter was a perfect example where we saw an 8% EBITDA increase on the back of a very strong 14% increase for the same period last year.

John will dive deeper into the numbers in a moment, but let me start out with a few highlights from the quarter. Our financial performance is our track record, but it is the day-to-day focus on execution by our teams that drives these results and really does set us apart. As an example, our teams have done a fantastic job of quickly integrating the MountainWest acquisition into our core business, and in fact, we’re pleased to announce that we’ve already secured binding precedent agreements to support a significant expansion on the newly acquired Overthrust Pipeline. This project was not even in our upside case for this investment, and the team has identified even more growth to come that is beyond our original expectations. Much of this growth is centered around coal to natural gas conversions in the western states.

On Transco, we continue to advance our emission reduction program and recently completing – completed our first large scale compressor replacement project in Virginia, our backlog of high return pipeline expansion opportunities continues to progress driven by a large wave of incremental demand that continues to exceed our expectations. As evidence of this continued wave of increasing demand, we recently concluded a non-binding open season to advance another large scale Transco project that will provide much needed capacity to serve our customers South of Station 165 in Virginia. Our customers recent – customers requested capacity that has been well in excess of the 800,000 dekatherms per day that we offered. Importantly, the minimum required term for this service offering was 20 years.

This underscores our belief in the durable and fast growing demand for capacity and the market’s confidence in our ability to deliver this capacity with the lowest environmental impact. Following the approval of the Mountain Valley Pipeline. We’re now working to find a way to serve as much of our customers’ needs as possible and hope to have an update on this exciting project soon. Moving on to financial performance, as I stated earlier, despite a weakened natural gas price environment, our financial results not only grew against a difficult comp in a difficult environment, but this quarter marked the 30th consecutive earnings print that either met or exceeded consensus estimates. Within our legacy based business in the Northeast, we produced record EBITDA and record gathering volumes delivering growth that far outpaced the total production across Marcellus.

Our strategy to focus on connecting our producing customers to the best markets with the most reliable service available has grown this business to the point it is nearing $2 billion per year of EBITDA. The completion of the Mountain Valley Pipeline, our Regional Energy Access project and continued growth of gas-fired generation in the local market will continue to provide market and volume growth well into the future. In the West, we also achieve record gathering volumes once again showing that our diverse geographic position is built to weather commodity price swings. In our transmission in Gulf of Mexico segment, we are enjoying the beginnings of a long runway of growth in the deepwater gearing up for a long string of expansions on Transco and enjoying better than expected growth in our MountainWest acquisition, which speaks to our successful integration.

Importantly, the strength of our base business more than offset weaker E&P earnings and expected low seasonal cash flows from our marketing business. The quarter’s results continue to prove out the inherent stability and stubborn growth of our business. However, when we see the market fail to appreciate our ability to deliver in most price environments, we will continue to execute on our authorized repurchase program much like we did during the second quarter. And finally, a few notes on our sustainability efforts. Last week, we issued our 2022 sustainability report and completed our annual CDP Climate Questionnaire. These are both important markers that detail our progress on key issues like environmental stewardship, community sport, and workforce development.

To us, sustainability means running our business in a way that will create value for the perpetual shareholder. So we’re proud to have also be providing our shareholders with industry-leading returns on invested capital, and we expect our shareholders to further benefit from enhanced capital returns as we execute on our large growth backlog, which among others include seven out of nine major pipeline projects that are coming online in the fourth quarter of 2024 and that will be stacked on top of a solid foundation of a sustainable based business. And with that, I’m going to turn things over to John to walk us through the financial metrics of the quarter. John?

John Porter: Thanks, Alan. Starting here on Slide 3 with a summary of our year-over-year financial performance, beginning with adjusted EBITDA, we saw another strong quarterly increase of 8% over the prior year, and this happens to coincide with an 8.6% CAGR over the last five years for this same measure. And this strong performance included a new record for gathering volumes, which increase 6%. Year-to-date, our adjusted EBITDA is now up 13% driven by the growth of our core infrastructure businesses, which continue to perform very well, even as natural gas price decreased 61% for the first half of 2023 versus the first half of 2022, once again, demonstrating the resiliency and strength of our natural gas focused strategy, our assets, and our operational capabilities.

For second quarter, our adjusted EPS increased 5% for the quarter, continuing the strong growth we’ve had in EPS over the last many years with our year-to-date EPS now up 23%. Available funds from operations AFFO growth for second quarter was in line with adjusted EBITDA and you see our second quarter dividend coverage based on AFFO was a very strong 2.23 times growing about 2% despite growing our dividend by 5.3%. Our balance sheet continues to strengthen with debt to adjusted EBITDA now reaching 3.5 times versus last year’s 3.82 times and that’s even after closing the Trace, NorTex and MountainWest acquisitions and also repurchasing $139 million worth of shares since last year. On CapEx, you see an increase primarily reflecting the progress we’re making on some of our key growth projects, including Regional Energy Access and Louisiana Energy Gateway.

For the full year, there’s no change to our consolidated adjusted EBITDA guidance of $6.4 billion to $6.8 billion or any of our other guidance metrics. But in a moment, I’ll provide a little color on our expectations for the remainder of the year versus the performance we’ve seen thus far in 2023. So let’s turn to the next slide and take a little closer look at the second quarter results. A strong 8% increase in EBITDA over prior year even as average natural gas prices for the second quarter decreased 71% walking now from last year’s roughly $1.5 billion to this year’s $1.6 billion, we start with our Upstream joint venture operations that are included in our other segment, which were down $43 million versus last year. Our Haynesville Upstream EBITDA was down about $14 million despite substantially higher production due to much lower net realized prices and a lower working interest percentage on new wells beginning in January of 2023.

Our Wamsutter upstream EBITDA was down $29 million due primarily to lower realized prices, but production also continued to be impacted throughout April from the historically difficult Wyoming winter weather we saw in the first quarter. Shifting now to our core business performance, our transmission in Gulf of Mexico business improved $96 million or 15%, including about a $52 million contribution from our MountainWest Pipeline and NorTex acquisitions, but with other increases in our transmission and deepwater revenues as well. Our Northeast G&P business performed extremely well with a $65 million or 14% increase, driven by an $81 million increase in service revenues. And we did have a one-time $14 million favorable gathering revenue catch up adjustment in that second quarter increase in service revenue.

But this revenue increase was really fueled by a 6% increase in total volumes in the Northeast. Shifting now to the west, which increased to $16 million or 5%, benefiting from continued strong volume growth in the Haynesville and positive hedge results that partially offset the impact of lower commodity base rates. And then you see the $22 million decrease in our Gas and NGL Marketing business and the majority of this decline was actually related to lower NGL marketing results from inventory valuation changes where we had to gain on NGL inventories last year at a loss this year. So again, the second quarter continued our strong start to 2023 with 8% growth in EBITDA driven by core infrastructure business performance in spite of natural gas prices that were 71% lower than second quarter of 2022.

So let’s turn the page and touch on the year-to-date comparison. Year-to-date, we’ve seen a 13% increase over 2022, walking now from last year’s $3 billion to this year’s $3.4 billion, we start with the upstream joint venture operations included in our other segment, which were down $39 million versus last year. Now, year-to-date, Haynesville is up nicely on very strong volume growth that has been significantly offset by lower realized prices. However, the overall Haynesville increase was offset by lower Wamsutter results due primarily to the historically difficult winter weather we saw in Wyoming this year. Shifting now to our core business performance, transmission in Gulf of Mexico business improved $127 million or 9% that’s really similar themes as our second quarter, namely the impacts of the MountainWest Pipeline and NorTex acquisitions, however, we have seen other significant increases in our transmission and deepwater revenues as well.

Our Northeast G&P business has performed very well with $117 million or 13% increase driven by $154 million increase in service revenue. This revenue increase was fueled by a 7% increase in total volumes focused in our liquids rich areas where we tend to have higher per unit margin than our dry gas areas. And in the appendix, you’ll 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 $42 million or 8%, benefiting from positive hedge results and the Trace acquisition, but the West was significantly unfavorably impacted by the severe Wyoming weather and January processing economics at our Opal Wyoming processing plant. And then you see the $144 million increase in our Gas and NGL Marketing business caused by the strong first quarter that we had at the start of the year.

So again, a continuation to the strong start to 2023 with 13% 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. So as I mentioned earlier, there’s no change to our consolidated adjusted EBITDA guidance of $6.4 billion to $6.8 billion or any of our other guidance metrics. We’ve definitely had a strong start to the year with $3.4 billion of EBITDA through the first half of the year. And thanks to the performance of our base business we have clear visibility to hitting at least the mid-point of our guidance even after a historic decline in natural gas prices and a historically difficult winter that continue to have impacts through April.

So you may be wondering, why we aren’t raising our guidance on the back of such a strong start to the year and a bright future ahead. First, I will remind you that our guidance does include a range of $200 million above our midpoint. And second, while we usually experience stronger third and fourth quarters than second quarter, the third quarter does occasionally see hurricane outages for our deepwater business. Finally, we could also still see downward shifts in natural gas prices for the balance of the year that could unfavorably impact our upstream joint ventures in particular. While we are not suggesting, there is a high likelihood of realizing these impacts, we do need to be prepared to overcome these scenarios. Therefore, it is too early to raise our full year guidance.

But once again, we are confident in the continued performance of our base infrastructure businesses, allowing us to once again meet or exceed the midpoint of our guidance range. We’re setting our sites on continued growth in 2024 before another big growth step in 2025. And with that, I’ll turn it back to Alan.

Alan Armstrong: Okay. Thanks, John. Just a few closing remarks before we open it up for your questions here. First, I’ll 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, which are complimented by our Sequent platform that delivers upside to our base business is unique and we have a track record to prove it. Second, our combination of proven resilience, five year EPS CAGR of 23%, industry leading coverage on our steadily growing dividend, a strong balance sheet and high visibility to growth we think is unique amongst the S&P 500 and unique within our sector.

Let me emphasize that our natural gas focused strategy has allowed us to produce a 10-year track record of growing adjusted EBITDA through a number of commodity and economic cycles. And it is continuing to deliver significant growth in the current environment. And we’re now celebrating 7.5 years of delivering inline or better quarterly results. That is especially impressive when you consider the sectors ups and downs over this period. And the fundamentals are setting up stronger than ever for this long-term predictable growth to continue. And finally, as we think about our long-term strategy, we see that 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.

Simply put, you cannot implement and accelerate wind, solar and large scale electrification without having natural gas as a reliable complimentary partner to these big system changes. In fact, despite continued growth in solar and wind capacity, the country saw record natural gas power demand in July, reaching as high as 53 Bcf per day last week to meet summer power loads. This tops the previous record set last July by 6%, again, compounding growth on top of compounding growth. And so if we truly do want to meet our country’s growing power demand for things like data centers and EVs and accelerate wind and solar power generation, we must continue increasing natural gas infrastructure capacity. This fact has become evident to both the majority of our legislators and the Biden administration as they came out with unprecedented support for Mountain Valley Pipeline’s completion.

Williams is here for the long haul and we are committed to leveraging our large scale natural gas infrastructure network for the benefit of generations to come. And with that, I’ll open it up for your questions.

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Q&A Session

Operator: Thank you, Mr. Armstrong. [Operator Instructions] We’ll take our first question this morning from Spiro Dounis at Citi.

Spiro Dounis: Thanks, operator. Good morning, team. First question, maybe start with gas macro. Looks like, we’re maybe approaching a trough here and some of the producer activity. So just curious to get your all’s view on what your producer customers are seeing and doing and really just how you’re thinking about the volume and price trajectory from here as we head into 2024 and really wait for LNG volumes to pick up a lot of the slack.

Alan Armstrong: Yes. Spiro, well, certainly, I wouldn’t say, there’s one answer to that question, but maybe I’ll try to summarize it a little bit. I think the majority of producers see a pretty bright future for demand right now. And as a result of that, they’re making sure that they’re not letting their systems fall into decline in a way that’d be hard to recover from. So I would say, they are much like a cat kind of poised for demand growth in the future, but really watching cost and trimming out cost where they can and kind of proving up their capabilities in certain areas. So I would say, it feels to me like the producers are trying to maintain level volumes as much as possible, but being poised for future demand growth, that’s pretty evident down the road.

Spiro Dounis: Yes. It’s helpful. Second question is maybe moving to leverage as you guys pointed out, you’re down to about 3.5 times now this quarter, so already below your target on the year. So just curious how you’re thinking about utilizing this excess balancing capacity. Is that the plan or really maybe even thinking about operating at these lower levels?

Alan Armstrong: Yes. I would just say, I think we really enjoy the flexibility that we have right now and we’ve been pretty clear about capital allocation. It’s nice to have a – such a large pool of ability to invest in our rate base at some pretty decent returns, and I think probably even some higher returns once we get through the next rate case, given the inflation and the cost of debt that’s gone up, that will drive us to be able to earn even an higher return in our rate base. So that’s really nice to have that pool of capital to be able to invest in. And that really kind of sits at the bottom of our stack of capital allocation, but team’s doing a great job of deploying that. As I mentioned, we completed our Station 180, which is a very large compressor station in [indiscernible] and the team brought that in a little bit ahead of schedule, and Michael and I actually got to go up there a few weeks ago and see that great effort by the team of modernizing our facilities there.

And so anyway, I would just say to answer your question more directly, we have places to place capital for nice return like that and I think we’ll continue to do that, but we certainly enjoy the flexibility that we have at this level to be able to place capital towards those kinds of opportunities.

Spiro Dounis: Great. I’ll leave it there. Thanks for the time guys.

Operator: Thank you. We go next down to Jeremy Tonet at JP Morgan.

Jeremy Tonet: Hi, good morning.

Alan Armstrong: Good morning, Jeremy.

Jeremy Tonet: Just wanted to start off with Appalachia, if I could Northeast G&P quite a good quarter there, recognize there’s a little bit of timing with the revenue catch up there. But just wondering if you could talk a bit more about what’s a normalized EBITDA level in the Northeast G&P right now. And are you seeing kind of a shift in production wet versus dry and is that impacting margins, just trying to get a bit of color for what the trajectory is here?

Alan Armstrong: Yes. I definitely think we saw producers focusing, where they have it available. We saw producers focusing on wet where there are producers that have that ability to shift. But while at the same time, I think keeping themselves poised for markets to open up. And so I would say, that’s kind of what we’ve seen. In terms of normalized EBITDA, I think the first two quarters are a pretty good sign of that. I think anytime you can just average that out over a couple of quarters, I think that’s a pretty good sign of a normalized number. But I do think as markets open up through both MountainWest and Regional Energy Access and continued industrial and power generation demand in the local markets, I think we’re going to see that PJM, certainly found itself very short power lasts year or – and during the winter time as well.

And I think we’re going to continue to see people build out power generation to take advantage of that. So I’m pretty encouraged, frankly, about in terms of the market outlook over the next couple of years for the Northeast. I do think that we’ll see the Northeast have an opportunity to take back some of the market share across the U.S. as a result of some of these markets opening up.