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Financially, pipeline giant Williams Companies(NYSE: WMB) is having a solid year evidenced by the 9.6% jump in its adjusted EBITDA to more than $2.1 billion. Driving this gain is a $200 million improvement in adjusted EBITDA at the company's master limited partnership,Williams Partners (NYSE: WPZ), more than offsetting an $18 million decline at Williams' NGL & petchem services segment. What's interesting about this result is that it was the natural gas liquids and petchem services segment of Williams Partners that was the key driver of growth for the two companies this year.
Drilling down into what's driving growth
Williams Companies derives its earnings from three segments:
Data source: Williams Companies press release. Chart by author. Note: In millions of dollars.
The bulk of Williams' earnings come from its ownership interest in Williams Partners. That said, it does directly own several assets in its NGL and petchem service segment including an off-gas processing plant in Canada at Canadian Natural Resources' (NYSE: CNQ) Horizon upgrader that just went into service in the first quarter. In addition, it has a propane dehydrogenation facility growth project in Canada and petchem pipeline projects under development on the Gulf Coast. However, the company just sold its Canadian assets for $209 million about a month ago, so this segment will have even less of an impact on the company going forward.
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Meanwhile, Williams Partners will become even more important than it already is given that Williams plans to invest $1.7 billion to boost its stake in the MLP over the next two years. That is worth noting because its MLP is having a pretty good year across the board:
Data source: Williams Partners press release. Chart by author. Note: In millions of dollars
Overall, Williams Partners' adjusted EBITDA is up 10.3% over the same period last year while its distributable cash flow is up 12%. Driving that performance is Williams Partners' NGL and petchem services segment where adjusted EBITDA is up a stunning 234% to $137 million. Two factors drove this result, $72 million in favorable olefins margins at its Geismar plant and $30 million of incremental fee-based revenues associated with its interest in the Canadian off-gas processing plant at Canadian Natural Resources' upgrader.
Can this segment continue to drive results?
While Williams Partners' NGL and petchem services segment was the story in the first half, it is unlikely to continue to drive growth. Along with its parent company, Williams Partners sold its Canadian assets earlier this month, netting about $817 million in cash. In addition to that, Williams Partners recently announced that it is exploring strategic options for its stake in the Geismar plant, which it just recently expanded. However, the facility's direct exposure to commodity prices has it exploring either a sale or a long-term, fee-for-service agreement for the plant. If the company sells Geismar, it will use the cash to repay debt and reinvest in growth projects. Meanwhile, if it holds the asset but converts it to fee-based, it would lose out on the ability to capture higher olefin margins in the future, which drove results in 2016. That said, it would also protect the company from the overall volatility of olefin margins going forward.
With the sale of its Canadian assets and the potential sale of its Geismar plant, there won't be much left of Williams Partners' NGL and petchem services segment. Its remaining assets consist of a commodities marketing business, an NGL fractionator and storage facilities in Kansas, and a 50% interest in the Overland Pass Pipeline. Because of that shrinking asset base, the company plans to fold this segment into its Atlantic-Gulf segment by early next year as part of an organizational realignment. That makes it clear that Williams Partners does not see this segment driving results in the future.
Instead, the Atlantic-Gulf segment will be the company's primary growth driver going forward.Fueled by $6.9 billion in planned growth capital investments through 2018, this segment should drive an incremental $1.08 billion of modified EBITDA to the MLP's bottom line by the end of 2018.
Williams Companies' biggest growth driver this year is going away because it is selling several assets to raise cash. Two factors are driving this decision. First, the assets it is unloading have too much direct exposure to commodity prices, which weighed on the company's results in the past. Furthermore, it sees better growth options going forward in its Atlantic-Gulf segment, which has an abundance of fee-based growth ahead of it to drive results for the next several years.
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