On August 4,
announced second quarter earnings that seemed troubling.
Revenues declined 8.3% to $1.616 billion, which is 12.8% below
analyst estimates. Meanwhile, earnings were down 65% from last
year and 70% below analyst expectations.
, the general partner of Williams Partners, did a little better
but still fell short of expectations, with revenues declining 5%
to $1.68 billion, 11% below analyst expectations. Earnings
per share of $0.23/share met expectations.
On July 1, Williams Companies announced it would be acquiring
the rest of
Access Midstream Partners'
general partner interest from Global Infrastructure
Partners for $6 billion. It eventually plans to merge Williams
Partners into a subsidiary of Access Midstream, so I'll also
cover Access Midstream's latest results in order to help
investors in Williams Partners and Williams Companies gain a
better understanding of what the future holds.
The good news
At first glance, these results seem to indicate that something
is amiss with this family of MLPs; however, when dealing with
capital intensive industries such as this, earnings are often
worth ignoring entirely in favor of adjusted EBITDA (earnings
before interest, taxes, depreciation, and amortization), which
give a better idea of how a company's operating units are doing.
Williams Companies uses a measure called adjusted segment
profit+DD&A to approximate this metric. Distributable cash
flow (DCF), which pays the distributions investors care about, is
also an important factor to consider. From these perspectives the
Williams family is doing great.
For example, Williams Partners actually reported a 30%
increase in DCF this quarter, as well as a 16% increase in
adjusted segment profit +DD&A and 7% increase in fee based
The coverage ratio was still a bit short this quarter, 0.87,
yet Williams Partners raised its distribution 6.3% and reiterated
its guidance for 6% annual distribution growth in 2014-2015, and
4.5% growth in 2016. Why would an MLP that isn't covering its
distribution do such a thing? The answer lies in its long-term
During its earnings release Williams Partners offered the
following guidance through 2016:
- Segment profits to grow from $2.01 billion in 2014 to
$3.225 billion in 2016 -- growth of 60%
- DCF to grow from $1.95 billion in 2014 to $3.085 billion in
2016 -- growth of 59%
- Capital expenditures to decline from $3.73 billion to
$2.228 billion in 2016 -- a decline of 40%
The decline in capital expenditures, a result of several
recent projects coming online, will help fuel massive growth in
DCF that will make the current yield of 6.9% sustainable.
Meanwhile, Williams Companies recorded 15% growth in adjusted
segment profit+DD&A and 16% growth in cash distributions from
Williams Partners. In fact, Williams Companies expects to receive
$509 million in cash distributions from its MLPs this quarter
alone. This will help Williams Companies execute on its guidance
of a 32% dividend increase in the third quarter -- upon the
closing of its Access Midstream acquisition. The company is
guiding for 15% dividend growth in 2015 due to continued strong
growth at Access Midstream.
Speaking of which, Access Midstream had a wonderful
- Adjusted EBITDA rose 33.2%
- DCF up 31.2%
- Coverage ratio a rock-solid 1.45
- Volumes up 6.8%
- Fee based revenues up 18.5%, 23.3% when revenue from equity
investments is included
- Distribution raised 22.7%
Long-term prospects remain bright
The Williams family of MLPs has one of the largest current and
potential backlogs in the industry at $29 billion through
Source: Williams Partners/Companies 2nd Quarter Earnings
To help put in perspective just how large a backlog this is
consider this: Williams Partners carries 14% of America's natural
gas and is planning on $25 billion in expansion projects.
transports one third of the nation's gas, and has a current and
potential backlog of $35 billion. Thus proportionate to its
size, Williams Partners' backlog is actually 69% larger than
What to watch going forward
The biggest thing for investors in Williams Partners, Williams
Companies, and Access Midstream to watch for is the successful
execution of the Williams Partners/Access merger from which
management hopes to gain three key things.
First, the merger will greatly improve Williams' presence in fast
growing shale gas formations such as the Marcellus/Utica
shales. This is due to Access's presence in almost every
major shale and oil formation in America.
Source: July 2014 Access Midstream Partners Investor
To put the production growth of the Marcellus into
perspective, the 15-fold increase in just the last seven years
means that this one gas formation is the fourth largest gas
producer in the world. That's larger than Qatar, Canada, and only
6% behind all of Europe combined.
According to analyst firm ICF International, the
Marcellus/Utica shale is expected to increase production by an
additional 127% through 2035. That's a megatrend that Williams
expects to fuel decades of strong EBITDA and distribution
Which brings me to the other two things to watch for
from the merger -- DCF growth and the distribution coverage
ratio. In its last earnings presentation Williams management
stated it expects the merger to result in total 2015 EBITDA of $5
billion and annual DCF growth of 20% through 2016. This is
expected to result in 10%-12% distribution growth through 2017
while maintaining strong distribution coverage.
That coverage ratio will be important to watch, given both the
fast growth of the distribution and the fact that Williams'
capital expenditures will soar past 2016 as it attempts to build
out its enormous project backlog.
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Williams Companies Earnings: Does This Spell
Trouble for Investors?
originally appeared on Fool.com.
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