Williams 1Q19: Becoming Besties with Encino in Ohio Utica

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Williams, one of the biggest midstream (pipeline) companies in the U.S., issued its first quarter 2019 update yesterday. Williams is a gigantic company with operations in multiple regions, not just here in the northeast. It would be folly for us to try and summarize everything about the company and its many projects, so we’ll concentrate on projects in the Marcellus/Utica.

We’ll begin with a few tidbits and a high level overview. Williams’ 1Q19 profit was $194 million, up $42 million (28%) from 1Q18. The reason? According to CEO Alan Armstrong: “Led by our Atlantic-Gulf and Northeast G&P (gathering and production) segments, each showing EBITDA growth of more than 20%, our key financial metrics reflected year-over-year growth.” In other words, Williams’ Marcellus/Utica projects are largely responsible for the company’s rosy performance in 1Q19.

However, total revenue dipped just a bit: $2.05 billion in 1Q19 versus $2.09 billion in 1Q18. Still, profits are up, even though revenues are down slightly. No complaints!

Most of the news of interest to us (in the M-U) comes from the conference call with analysts. Armstrong opened his prepared remarks by saying he would keep his prepared remarks “brief”–then went on to deliver one of the longest such talks we’ve read!

A few excerpts from Armstrong’s “brief” prepared remarks:

Now moving over to look at the financial performance of the continuing business, Atlantic-Gulf led the increase with an over 20% increase in adjusted EBITDA, driven by top line revenue growth from new expansion projects including Atlantic Sunrise and Gulf Connector, really very impressive growth from the Atlantic-Gulf driven primarily by continued projects that have been going into service on a regular basis on Transco.

Next up looking at the Northeast GMP area we also see just over a 20% increase in year-over-year adjusted EBITDA. This was driven by 15% higher gathering volumes and higher gathering fees associated with expansion projects. Volume increases were led by the Susquehanna Supply Hub area which grew about 25%, but we also saw a double-digit growth rates in the Marcellus South and Utica and a high-single-digit growth in the Bradford and OVM areas, so overall very nice start to the year for the Northeast GMP.

Northeast G&P was pretty flat to the fourth quarter, where increased revenue and lower O&M expenses were offset by lower wet Utica gathering and JV EBITDA from Aux Sable for our interest — Aux Sable and Blue Racer midstream recall that Aux Sable is an on-off interest in a processing complex in Illinois. And as we discussed in the past, the Northeast EBITDA growth in 2019 is more weighted toward the second half of 2019, and we’ll be covering the outlook for the Northeast in more detail in a moment.

Looking beyond 2019, we are still expecting 5% to 7% annual adjusted EBITDA growth over the long-term. So let’s move on to the next topic which is an update on the Northeast growth. As you’ll probably recall at our third quarter earnings call, we introduce forecasted 15% CAGR for the Northeast area gathering volumes growth for 2018 through 2021. Since then, we continue to work with our producer customers during two more forecasting cycles.

And since last fall delays in outages on Mariner East and delays on major gas takeaway pipeline like MVP have dampened the realized price expectations for producers in the area on a forecasted basis. So despite this price decline, I’m pleased to say that we are still expecting to see a 15% growth rate again this year on gathered volumes and a slightly higher EBITDA growth rate for the Northeast in 2019. Most of this is on the backs of great performers like Cabot and Southwestern. But increasingly we will see the impacts of additional investments by Encino on their new Utica acreage.

Next up, let’s get an update on our deleveraging efforts. With that excellent execution this year on our portfolio optimization efforts, the Northeast JV transaction with CPPIB accomplished multiple benefits for the Company. Consolidating the UEOM and the OVM systems while bringing up immediate cash for deleveraging and aligning us with long-term strategic partner who also owns and controls one of the most important customers in the area, Encino. Encino has attracted some very experiencing capable personnel and we are excited to be forming another key mutually beneficial relationship in the region, much like we have with Cabot and Southwestern today.

And we continue to present any upside from the rate case — sorry continued to not have any of that upside build from the rate case reflected in our financial guidance. And let’s also touch on the status of Transco’s major growth projects here. Lots of news out there these days and questions regarding the effects of the recent Presidential Executive Order might have for our projects. Obviously Williams supports efforts to foster coordination, predictability and transparency in the federal environmental reviews and the permitting process for energy infrastructure projects.

Along those lines, we were actually very impressed with the level of detail that appeared in the executive order on complex issues like the EPA’s water quality certification requirements and we are appreciative of the administration’s efforts and in strong support of a sustainable approach to ensuring consistent application of EPA’s regulation. However, we know that any major shifts in policy is coming out, the executive order will likely be challenged by oneness of infrastructure and fossil fuels no matter how clean.

We deal with these permitting challenges on a daily basis and our project development teams consistently do great job of navigating those. And so beyond presidential orders, we continue to advance our key New York and New Jersey projects like the Northeast Supply Enhancement project, the Rivervale South expansion and our Gateway expansion by demonstrating their critical importance to the markets they serve and the quality of our execution track record, as was most recently demonstrated by our teams on Atlantic Sunrise.

Transco’s large scale existing right of way and vast interconnection network are really the best way to bring clean, safe affordable and reliable natural gas with these Northeast population centers, that allow these regions to continue to lower the greenhouse gas emissions. And to that end, we continue to press on that 20-plus Transco projects we currently have in development, including the most recently announced Regional Energy Access project, the binding open season for our Regional Energy Access was extended from April 8 to May 8 to give shippers additional time to get the approvals they needed not for just the indication of interest, but for binding commitments. And we have been impressed with the interests the project has garnered. We are targeting a final investment decision in the third quarter of this year with pre-filing to follow.*

What we notice in Armstrong’s comments above:

  • The northeast continues to be a major (maybe THE major) driver of revenue for the company.
  • Quite a bit of talk and excitement about Encino Energy, which bought out Chesapeake Energy’s Ohio Utica assets last year. Williams is working closely with Encino to gather gas from new wells. You might say they’re becoming besties. 🙂
  • Williams liked President Trump’s EO and believes it will help them overcome pipeline resistance in states like New York.

During the Q&A portion of the call, we found the following interesting exchanges:

Jeremy Tonet

Wanted to start-off with the Northeast G&P and I was wondering if maybe you can provide a little bit more detail with the volume growth that you’re talking about. Maybe some thoughts on the cadence there how you see that kind of progressing over the next several years, based on producer conversations and also kind of CapEx specific to this area? Has that lightened up at all?

Alan Armstrong

Yes, in terms of cadence I would just say right now we’ve got a lot of activity, a lot of wells being and pad being turned in the line right now as we speak actually here in the last month. So a lot happening out there right now, it’s all over the place both in the Northeast and the Southwest. And so what’s going on that, I would say in the Utica area the Encino team there has just now taking over operations of that area, and transition from Chesapeake and that we are really working closely with them to have kind of the same kind of integrated approach to development and growth development that we have with both Cabot and Southwestern, so really excited about the team they’ve pulled together there at Encino and our ability to work with them.

In terms of kind of the cadence there, I would just say certainly, Cabot intending to lead the way with development with 20% kind of growth. And so I would the Northeast PA continues, they have continued to invest with or support our expansions of further expansion on our gathering systems out there. And of course we’re very interested in additional takeaway capacity out of the area, given the big reserves and the low cost reserves they have in the area. But I would say in the Northeast there really hasn’t been anything other than just continued steady performance by Cabot, and we’re starting to see that kind of spread in to some of the other areas as well like in the Bradford area. So Northeast, so I think is very predictable and steady. The areas that have more I would say volatility in terms of ups and downs and perhaps things are little more reactive — the prices is in the west gas areas like I mentioned earlier, both the Marcellus wet and the Utica wet. And a lot of that, I would tell you is driven by pretty sharp price — realized price decline on NGLs that were associated with the Mariner East up and down, in the course of now hoping for expanded capacity out of their own Mariner East 2.

So I would say that the pricing forecast on NGL has been difficult to predict. And of course the gas takeaway situation particularly with the MVP has been pushed back a little bit as well. So I think those things will resolve themselves as we get in. Obviously as we get into 2020, I think those things will resolve themselves. But we are seeing those producers be very responsive and I would say very strict about living within their cash flows and their forecasted cash flows. Of course that requires them to forecast prices. But I think that’s what we can look to in terms of signals there. Our drilled outflow continues to be pretty robust for both the Southwest PA and the Utica area, a lot of new capital. But we’re finding ways to really trim that back, and have a capital come on just in time, as the production comes on and so that’s what you see we requested in some of our capital pullback and redemption in capital, that you see here in our guidance.

Jeremy Tonet

That’s helpful. Thanks for that. And turning to UEO-OMV the combination there, just wondering if you might be able to provide a little bit more detail as far as some of the synergies you see, bringing those two assets together as far as capital efficiency improvements.

Alan Armstrong

Yes. Great question. It’s reeling on two fronts. First of all, the very simple front there, is on the liquids front, so we have the Moundsville fractionator sitting there, that has been running right up against its maximum capacity and we had some investments, that was going to be required there to continue to operate that facility, and to expand it. And now we’re going to enjoy being able to put those liquids through our new pipeline that we’re building over to the Harrison fractionator. And so, we’ll be taking those liquids over to the excess capacity, big excess capacity that exists at the Kensington fractionator. And so they were sitting there a lot of the latent capacity on the fractionation side, and better markets there at the Kensington area.

So effectively allows us to shift our focus of growth for fractionation and reduce any investment required at Moundsville, and quickly take that capital out of our capital plan, so that’s the simple side, on the more complex side we also are looking at ways to take advantage with the excess processing capacity that UEOM enjoys. And we’re starting to run up on the capacity constraints there at OVM. And if growth continues there we’ll be looking for ways to move volumes over to UEO as well. So those are kind of some of the obvious issues, obviously there is management consolidation and overhead consolidation, that’s beneficial to us. But a lot of it really just has relates to being able to take capital out of our plan that would have otherwise been in there.

Jeremy Tonet

That’s really helpful. Thanks. And last one if I could, it seems like NESE could really lower CO2 emissions by displacing dirtier fuels. Just wondering how that messaging is resonating in the communities that you’re looking to operate in there? When do you see kind of the path forward at this point as far as permits been — when construction could start there?

Micheal Dunn

We absolutely think that NESE is a key piece of the puzzle in the New York city and New Jersey metropolitan to reduce emissions especially CO2 emissions, it’s very dramatic in regard to the emissions profile of the fuel oil. It’s currently being used and converted to natural gas up there. And we’re going to be a key part of that, continuing opportunity to convert. If NESE gets approved and we think it will and gets built. The permitting process is currently in the late stages here. We expect to receive a FERC certificate for that project any day now. And the 401 Certification deadline in New York was mid-May. And then the 401 Certification deadline in New Jersey is mid-June. So we would expect several of those permits to come to the forefront here in rapid fashion.

Christine Cho

Good morning, everyone. You guys have talked about wanting to consolidate Northeast for some time. And obviously the UEOM tend to actually test you in that direction. How should we think about the potential for Blue Racer to be included under that umbrella?

Alan Armstrong

Great question, Christine as always. And I would just say the — a lot of value in that combination, we’re working through some various transactions to try to extract some of that other than through direct control of the asset. But certainly a lot of opportunity there. But I would just say we haven’t been able to get there from a price standpoint, we haven’t been able to get to what we thought it make sense for us on that. And so I would say lots of opportunity, but we remain patient and will remain patient with making those combinations. So, but I do see some opportunity just contractually to continue to find ways to utilize common facilities out there and I think that’s a — step in the middle if we can’t reach agreement on a broader transaction.

T.J. Schultz

On the executive order, you guys highlighted what’s your expectation from the DOE, is it worse to submit report just on timing to get more clarity around that? And any input you all are having on that process?

Alan Armstrong

Well, obviously on the Presidential Executive Order, first of all we were really impressed with the work that was done by the various attorneys — staff attorneys around EPA. I think everybody recognize that the — some of the so called guidelines and I’ll use quotes around that, term guidelines had been put in place during the Obama administration, that has become treated almost like rules by the state and in fact, there never really been a regulatory process to establish that. And I think the appropriately the EPA administration is regardless of which part of the affiliation you’re interested in. I think they thought, that was not proper administration and regulation and so they’re trying to bring clarity to that.

And I think exactly what we’ve been asking for, we haven’t been asking for easier regulations, we’ve been asking for clear and consistent regulations. And that’s exactly what we thought the order tried to address without overreaching toward any one particular project. So it’s something that need to be cleaned up. And if you really dig into that, it’s actually a very astute and a detailed approach to it, that we really applaud. I think it’s exactly big step in the right direction and it’s obvious to us, and there was great experts involved in that. So well, I don’t see it being a miracle tier for anyone of our particular projects that we have out there right now. I do see it as a big step in the right direction for bringing clarity and consistency between how the states and the Fed still with Clean Water Act regs within the EPA. So pretty impressed frankly with sophistication of that work.

T.J. Schultz

Okay. It makes sense. Just one more, you mentioned on Bellevue a couple of times, may be ignoring timing on end service, they’ve built a lot of that project. Assuming they get to Station 165, you talked about synergy, has that moved into commercializing anything at this point, if they have to wait on firmer in-service, just any color on the benefits there see you all. Thanks.

Micheal Dunn

Sorry, just to clarify you were talking about Moundsville pipeline is that correct?

T.J. Schultz

Yes, sorry about that. Moundsville pipeline.

Micheal Dunn

Okay. Yes, thank you. This is Michael. Just seeing what the Moundsville pipeline backers have said about their project, obviously they feel certainty in regard to completing their project. And we’re obviously watching that very closely along with them. And ultimately we’ll get Station 165 area and they’re very likely should we take way opportunities for us, from that point on the Transco system, once that project gets closer to some certainty there. So we’re certainly looking at that and willing to take on any customer-related projects, that would like to move that gas away from the Station 165, we certainly think there is opportunity to do that.

Jean Ann Salisbury

Hey, good morning. It looks like latest growth into Transco from the Northeast Marcellus, around 4.5 Bcf/d including Atlantic Sunrise. Is that effectively the max capacity for Transco there? Is there anyway that you could take more gas than you paid for — just a compression anything like that?

Micheal Dunn

Obviously say, there is — just to remind everybody on that. Transco’s capacity is fully sold, so it’s consistently sold out of the [Technical Difficulty]. And so really what we’re talking about is just the interrupt, just lows and how much we can physically flow during the period and that’s very dependent on local loads where the gas need to be delivered to. And so there is a lot of variables that go into play there. But I would say generally, we are constantly maximizing capacity out of that basin right now, because the margin support that. But a lot of that is managed by the shippers, in other words they’re the one who is dictating where they want to move the gas to and from. So a lot of that has been calculated by them. But I think that’s where I would say every day we’re optimizing as much as we can move that, that area.

Jean Ann Salisbury

Okay. That’s helpful.

Micheal Dunn

[Indiscernible] are staying full like Atlantic Sunrise has virtually been full almost since day one. So that does bode well for the future opportunities to move additional expansion volumes out of there with new projects. So Regional Energy Access, Jean Ann, Regional Energy Access though takes advantage of a lot of existing infrastructure as does the Leidy South project, that we’re working on for National Fuel Gas and for Cabot. And in so there is obviously some pretty easy expansions out of the area, relatively the project seems better working on that [Indiscernible] we got a lot of compression, we can do and a little bit of looping to do — to add capacity out of that area.

Craig Shere

Good morning. Most of my questions have been answered. I did have a quick one. Alan you commented on the weak wet gas, in Marcellus and Utica in terms of recent trends, and NGL pricing looks like Blue Racer had a pretty tough quarter. How do you see all those impacting the pace at which your new West Virginia panhandle processing might fell off over the next couple of years?

Alan Armstrong

Yes. I think Craig, the investment we have there feel pretty good about that filling up. And it is as I mentioned earlier we got a lot of pads being turned online, and so really starting to see that come off. It doesn’t — it didn’t a lot, big as those patents are, to make progress on that front. And we had some contracts coming our way that are shifting volumes our way. So feel pretty good about the TXP-2, the existing base capacity plus TXP-2 and we were able as a result of this synergy and knowing we have excess processing capacity, the UEO, that takes — puts us in a position to not have to prebuild any capacity out in front and don’t grow any further.

So this energy or the — as I mentioned earlier one of the nice things about that synergy is that, it prevents us from having to put capital in place to build out in front of those increasing volumes, because we do have alternatives that where we can ship those volumes to, but preserve the cash flows from it. And so I would just say, that gives us a lot more breathing room and allows for better capital efficiency as it relates to the OVM processing capacity. And so we intend to take full advantage of that.*

*Seeking Alpha (May 3, 2019) – The Williams Companies, Inc (WMB) CEO Alan Armstrong on Q1 2019 Results – Earnings Call Transcript

Williams’ full update for 1Q19, including financials:


Latest slide deck, used during the conference call:


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