Williams Companies and its recently merged MLP, Williams Partners , reported a great quarter last month, but with revised guidance that indicated that the recent collapse of energy prices may be weighing on their growth prospects. Let's examine four key quotes from Williams' earnings conference call -- an invaluable but often underutilized investment tool -- to see how the energy price crash may affect payout growth going forward, and what that means for long-term income investors.
Management is being conservative with long-term energy price forecasts
Management has revised its growth projections and investment plans based on the expectation that oil prices will average $55, $65, and $70 per barrel in 2015, 2016, and 2017, respectively.
Natural gas prices, which are more applicable to its core businesses of transporting, processing, and storing natural gas and natural gas liquids or NGLs, are projected to average $3, $3.25, and $3.75 per thousand cubic feetin 2015, 2016, and 2017,respectively.
NGLs such as ethane have been a drag on Williams Partners in recent years as the massive growth in U.S. natural gas production has resulted in a massive glut of supply. While the petrochemical industry is investing heavily into using this cheap feedstock, it may be a few years before NGL prices recover, as the infrastructure required to make use of NGLs needs to be built out.
Falling rig count doesn't matter all that much
Since so much of Williams' business comes from gathering, processing, and transporting natural gas, how many natural gas drilling rigs are operating is important to watch. According to Baker Hughes,as of February 27, 280 rigs were drilling natural gas wells in the United States, down 83% from the peak of 1,606 reached on September 12, 2008.
However, while true that the natural gas rig count is now at historically low levels, this doesn't necessarily bode poorly for Williams. That's because gas production, especially out of the Utica and Marcellus shales, has exploded in recent years, as productivity per rig -- courtesy of more advanced fracking techniques -- has increased gas production per rig by as much as 25 times.
Revised guidance is due to sandbagging
Previously, management had guided for 15% dividend growth through 2017 for Williams Companies, and 10% to 12% distribution growth for Williams Partners during the same time period. Now management is guiding for 10% to 15% dividend growth, and 7% to 11% distribution growth. However, as this quote makes clear, that doesn't necessarily mean management believes the payout growth will be significantly lower than previously expected. Rather, management is just trying to be conservative in its guidance -- in the face of the crash in energy prices -- so it can more easily meet and possibly exceed growth projections in the future.
Aggressiveinvestment program is proceeding as planned
With a 33% increase in adjusted EBITDA, or earnings before interest, taxes, depreciation, and amortization, likely over the next three years, I'm confident that Williams Partners should be able to sustainablygrow its distribution -- it's just a matter of how fast -- which should also mean strong growth in payments to Williams Companies, its general partner. That should mean strong earnings and dividend growth for Williams Companies in the years ahead.
Investor TakeawayWith 88% of its gross margins protected by long-term, fee based contracts, and 99% of future investment going to similar projects, Williams Companies and Williams Partners shouldn't have any problem preserving consistent and predictable cash flows to continue paying their generous yields of 4.9% and 6.7%, respectively.
In addition, with $9 billion in new investments in fee-based projects coming in the next three years, I think it's highly likely that long-term income investors will do well owning both Williams Companies and Williams Partners in the years to come. Even if the payout growth rate falls short of earlier predictions, the combination of generous present yield and moderate dividend and distribution growth is, in my opinion, likely to generate long-term, market-beating total returns.
The article 4 Key Things Williams Companies Inc Management Wants You To Know originally appeared on Fool.com.
Adam Galashas no position in any stocks mentioned, however, he does leadThe Grand Adventuredividend project, which owns Williams Companies in several portfolios.The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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