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Investors had several questions that they wanted Williams Companies (NYSE: WMB) to answer when it reported third-quarter results last week. While the company clarified some of those inquiries, it was not able to respond to all of them. As a result, investors were leftstill wondering what they can expect from the company in the years ahead.
One of the primary questions on investors' minds this quarter was whether the company's MLP Williams Partners (NYSE: WPZ) continued to grow earnings. As the slide below shows, not only did it do just that, but all five of its segments contributed growth during the quarter:
In millions of dollars.Data source: Williams Partners. Chart by author.
The primary driver was the continued improvement in the company's NGL & petchem services segment, which earned an extra $33 million from higher olefins margins as a result of improved production levels at its Geismar plant and higher ethylene prices. In addition to that, the company benefited from three new growth projects that went into service during the quarter and from further cost reductions. This performance showed that operationally, the company is firing on all cylinders.
That said, while the company answered all investors' operational questions, it could not yet answer several of their strategic ones. That was apparent by some of the comments from Williams' management team on its third-quarter conference call.
For example, the company announced in early September that it was in the process of exploring the monetization of its Geismar olefins facility, which could result in either a sale or a long-term fee-for-service tolling agreement. Analysts had hoped to get an update on the process this quarter and learn which direction the company was leaning. However, on the call, CEO Alan Armstrong only said that the company "remain[s] open to both" options. He stated that Williams has a "long, long and large list" of interested parties but that it likely wouldn't know its direction until the end of the first quarter.
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One of the reasons the outcome of the Geismar process is important is that a sale could help the company close its gap between capital expenditures and capital resources. With Williams entering a peak spending year in 2017 as a result of starting construction on several key projects, it needs between $2.1 billion and $2.8 billion in capital to fund these projects. While that is down from its earlier estimate afterWilliams Partners' essential Atlantic Sunrise projecthit a snag -- which will push some spending into 2018 -- it is a substantial amount of money, given current market conditions. Some of that capital will come from Williams Companies, which is providing support by reinvesting a portion of the distributions it receives from Williams Partners; however, that is not going to be enough. Unfortunately, the company did not have any answers for analysts about how it intends to finance the balance of next year's plan, with CFO Donald Chappel saying on the call that he is "not prepared to provide any guidance today."
Another important question is if there were any changes to the company's guidance for dividend growth and leverage targets in light of its strong third-quarter earnings or the delay to Atlantic Sunrise. To that question, Armstrong responded, "No, we have not put anything out beyond 2016." Instead, he stated that the company would be making those decisions when it announces its 2017 guidance -- either early next year or when it reports fourth-quarter results, which will likely be mid-February. The reason the company is waiting is that it should have an ideaon the outcome of the Geismar process, a better grasp on its ability to raise outside capital to fund growth projects, and a greater sense of the outlook for the oil and gas market if itwaits a few more months.
On the one hand, Williams Companies' third-quarter report put to rest any questions about its operating ability during the downturn after Williams Partners reported strong results across all of its business segments. That said, the company was not able to answer some of the most important strategic questions on investors' minds because it just doesn't have enough information to be in the position to offer specific guidance. Because of that, investors must wait until early next year before they know what Williams plans to do in 2017 and beyond.
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