Williams Companies (NYSE: WMB) has been busy this year. The pipeline giant has been actively reshuffling its portfolio. That's a continuation of its efforts to shore up its financial profile so that it can sustain and grow its 5.3%-yielding dividend. All this wheeling and dealing, however, could weigh on its near-term growth. That's one of a few things investors should keep an eye on when Williams Companies reports its first-quarter results Wednesday evening.
See if Williams reduces its full-year forecast
Williams Companies is in the midst of a major transformation to reduce its exposure to commodity price volatility and improve its leverage metrics. That led it to sell $4.6 billion of assets through the end of last year, which helped push its debt-to-EBITDA ratio down to a more comfortable 4.8. Despite those sales, the natural gas pipeline giant generated a record $4.64 billion of adjusted EBITDA in 2018, up 2.4% year over year, while distributable cash flow (DCF) increased 11.3% to $2.87 billion.
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Williams used its increasing financial flexibility to invest in expansion projects that it initially anticipated would boost 2019 EBITDA up to a range of $4.85 billion to $5.15 billion, a 12% increase at the midpoint. Meanwhile, the company guided for DCF to be between $2.9 billion and $3.3 billion, up 8% year over year at the midpoint. That earnings growth would push leverage down a bit more to 4.75 times.
However, the company sold additional assets this year. In mid-March, Williams formed a joint venture with a Canadian pension fund to consolidate two of its gathering and processing (G&P) systems in the Marcellus and Utica shale region. The company received $1.34 billion for a 35% stake in two G&P assets. It used about $750 million of that money to buy out a minority partner in one of the systems, leaving it with $600 million to use toward debt reduction. Williams followed that up by selling its 50% stake in a G&P joint venture in the Powder River Basin to partner Crestwood Equity Partners (NYSE: CEQP). Williams received $484.6 million in cash in that deal while also saving $90 million in planned expansion spending.
While these asset sales brought in more than $1 billion in cash to help pay down Williams' debt, it's giving up the associated cash flow. Crestwood Equity Partners, for example, boosted its EBITDA guidance by $40 million at the midpoint as a result of taking full control of its joint venture with Williams. That's why investors should see if Williams makes a negative revision to its full-year guidance as a result of all this deal making.
Look for additions to its expansion project backlog
One reason Williams has been selling assets is to give it the financial flexibility to invest in higher-returning expansion projects. In February, for example, the company signed agreements with fellow midstream specialist Targa Resources (NYSE: TRGP) to build the Bluestem Pipeline, which will move natural gas liquids (NGLs). Williams will construct Bluestem to connect its NGL fractionator in Kansas -- which separates raw NGLs into higher-value products like ethane and propane -- to Targa's Grand Prix pipeline. Williams also has the option to buy a stake in one of Targa's NGL fractionators in Mont Belvieu, Texas. Williams expects to invest $350 million to $400 million into these NGL projects.
Williams has several more expansion projects in development that it could sanction this year. Ideally, it will have approved more during the first quarter. That would give investors increased visibility into how fast the company can grow earnings -- and its dividend -- in the coming years.
Anticipate a near-term speed bump in hopes of long-term reacceleration
Williams could disappoint investors when it reports first-quarter results this week since its recent asset sales might cause it to reduce its full-year guidance. However, those sales will improve its financial profile so that the company can continue investing in high-return growth projects. That's why investors should pay close attention to whether Williams was able to secure more expansions, as they could give it the fuel to grow its already attractive dividend at a faster pace in the future.
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