The Williams Companies, Inc. (NYSE:WMB) J.P. Morgan Energy, Power & Renewables Conference June 22, 2022 8:20 AM ET
Company Participants
Micheal Dunn – EVP & COO
Conference Call Participants
Jeremy Tonet – Equity Analyst for Utilities and Midstream, J.P. Morgan
Jeremy Tonet
Good morning everyone. Can you hear me? Is the mike on, okay there we go. Good morning everyone. Thank you for joining us. This morning we are very excited to be joined by Micheal Dunn, COO of Williams to talk about all the great things going on in the William story right now. So with that, I’ll kick it into questions. If you guys have questions, I think you will be able to send it here and I can try to work those in if you can.
Micheal maybe just starting off on the first quarter call, Williams increased their guidance, and I was just wondering if you could kind of walk through the factors that drove it high in there?
Micheal Dunn
Sure. Thanks, Jeremy. Thank you. And thanks for hosting us today. We really appreciate the opportunity to talk about the Williams Companies. We really saw the year unfolding there after our first quarter earnings call in a very favorable fashion. When you look at our base business, we saw some significant growth that we expect it to occur. And that was really one of the drivers that saw us to increase our guidance. We also saw the fact that we had the Trace acquisition that we expected to close on. And that was another component of our increased guidance for the year.
And then finally, we just saw the commodity price situation with our Upstream acreage that we have today where, we put together a price curve, obviously at the first of the year and embed that in our guidance. And as we all know, the price curve has moved up throughout the year. And we certainly saw that and envision that after our first quarter earnings. And so that’s another reason why we really increased our guidance for the year there. And we have a high expectation of our production coming on in the Haynesville at or better than what we projected when we initially established our guidance for the year.
Jeremy Tonet
Great, that’s very helpful, and maybe kind of starting at a high level here natural gas supply demand dynamics. I was wondering if you could walk us through, I guess your thoughts here, higher gas prices thought to be better. But it could be too high. It seems like the levels we’re at now might not be great for the industry. But just wondering if you could walk us through how you think about it. And where do you see the supply response coming? I imagine that these price levels, everything in the country is economics. So curious for your thoughts there?
Micheal Dunn
Sure. Yes, we’ve always thought about demand being the key driver to our business on the natural gas strategy that we have. And so that’s why we’ve always talked about the sensitivity to natural gas prices and what that can do to demand destruction. And so there is definitely a sweet spot there where the natural gas pricing can drive out, at least in the long term, some demand. I think in the short term, we’re not seeing really any demand destruction at all in regard to natural gas, the coal-to-gas switching situation in the U.S. The coal really isn’t responding to the power prices increasing, we’re still seeing significant demand for natural gas in regard to power generation.
So the seen the seemingly thought about high natural gas prices impacting power generation, it just not materializing as you might expect. And so I would like to see some moderation in natural gas prices, certainly and because on the long term, we think that does have the ability to create a demand destruction situation, at least in the U.S. I’m not sure about the LNG opportunities. It seems like the appetite for LNG worldwide is going to continue to grow. And I think the pricing there will respond to that meaning that look at the LNG prices today, I think I would like to see some moderation there as well, because alternatives will continue to creep in. If you see LNG prices as high as they are, you’ll see more countries pivoting to more coal. And I think that is the situation that we don’t want to see worldwide from an emissions standpoint, as well as the opportunities we see for LNG leaving the U.S. shores.
So I’d say we’re concerned obviously, when we see natural gas prices getting as high as they were the $8, $9 range. I do believe that’s probably a short term situation, you’re going to see a supply response to that. But so far, we’ve seen a lot of discipline amongst our producer customers. And they’re really sticking to their story that they laid out the beginning of the year where they were going to go in and maintenance mode. And for us, we’ve been projecting a slight increase in production volumes on our gathering systems this year, because we had a significant increase over the last several years. So we got to a plateau where our producers are now going back in and we’re catching up with expansions. To catch up with them, we have a number of expansions in our producing areas underway that will really come online next year to see some new trajectory of growth volumes. So I would say maintenance mode looked pretty reasonable to be beginning of the year, prices have responded significantly to the supply deficits. And I would say the response that we’re seeing from producers still seems to be disappointed.
And I think some of that’s really driven by services. There’s a lot of service challenges on the production side, a lot of fracking — challenges, people challenges, sand, trucking challenges. So I would just say they’re, they’re being careful. And if the crews aren’t there, the crews aren’t there. And so I think that’s one of the reasons why we’re seeing some challenges out there on the producing area.
Jeremy Tonet
That’s helpful. That makes sense. At these price levels it seems like everything in the country’s economic, you could bring back the grant wash at the Mississippi line at these levels everything works. But it seems like the OFS [ph] bottlenecks are really the key issue here. So wondering when you see I guess the industry kind of working through that. Is it more of a 23 situation at this point? And but it well, I guess we’re most interested in is where does Williams have, lead in operating capacity, where volumes come in really drops to the bottom line?
Micheal Dunn
Yes, I think on your first point on the oilfield services. And certainly I think the producers are probably more adept at speaking about this. But what we see there is there’s there’s been a workforce challenge there. People have a boom and bust cycle. And when people get laid off from those jobs, when we had the downturn to do to COVID, you saw a lot of people lose their jobs. And I think there’s some skittish workforce situations out there. And that’s a challenge for the producers. And we don’t see that obviously, in our business, it’s pretty steady in our business. But we do see that on the workforce side.
So I think, in order to attract more people back into this business, they’re going to have to see some certainty and opportunity there. And I think as we continue to have these supply challenges, you’re going to see some longer term opportunities for the workforce there. So I’m optimistic I guess about workforce coming back into the industry on the production side.
I would say for us, we see a lot of latent capacity in a couple of areas. Now our legacy Haynesville position that we had prior to the Trace acquisition were full there. So we have a couple of expansions underway. One will come online this summer, then we’ll have another one in 2023. The Trace acquisition we made, we have a lot of capacity available there. So our position in the Haynesville went from about 1.8 Bcf a day of capacity to over 4 Bcf of capacity today. And certainly the Trace system has been built up nicely. Not a lot of additional capital is needed there to increase volumes to that system. So we’re encouraged by what we acquired there and continue to pursue opportunities on the fringes of that system.
The Northeast, we still see some, some opportunities to fill some of our systems, but we have several expansions underway in the northeast, as I said earlier, so those likely will come online in early to late 2023, depending on the system. But there are areas where we are able to move additional volumes through capacity like in our Blue Racer system so that we can utilize link capacity there when it’s available and vice versa, ultimately system.
So right now we have a project underway to connect our Utica East Ohio Midstream business to the Blue Racer system. As you probably know, we own 65% of UEOM with our partner, the Canadian pension plan. We are a 50% owner in Blue Racer and first reserve was our partner there and so we have the opportunity to move volumes between those two systems and take advantage of capacity when it becomes available in either one. Right now our UEO systems are very full. And so we see that opportunity coming very soon to move volumes over to Blue Racer system where they have some capacity available.
Jeremy Tonet
Got it, that’s very helpful. And sticking with the Haynesville a bit more here seems like there’s a lot of activity there potential a lot of growth. Just wondering, how you think about that developing basis, the outlook for bases there and how does LEG compete I guess versus others. Seems like there’s a few projects is the room for all of them or any thoughts along those lines?
Micheal Dunn
Yes, there’s a lot of activity in the Haynesville right now in the gathering side, as well as the takeaway pipelines that are being evaluated. There are LEG project we are in the final phases of buttoning up all of our contracts there and anticipate an FID on that project very soon. So we’re very encouraged by what we see there. If, if you recall the LEG project is about a 1.8 Bcf a day gathering pipeline trunk line system that would basically traverse through our Haynesville acreage, and it would come down to the Transco pipeline area and Gillis, the Gillis point in Louisiana. So we are very close to FID being that project and very encouraged by what we see there.
I would say it’s definitely a challenging environment. Right now there is a lot of competition. But we do believe building out the LEG project will eliminate any basis risks that we see for our production there with our partner, GeoSouthern in that South Mansfield area as well as our customers on our gathering systems. So we’re definitely looking out for them. We market a lot of gas actually, for our customers in the Haynesville, some of our smaller customers. Sequent does market that natural gas as well as they market all of the gas coming off or our GeoSouthern partnership.
Jeremy Tonet
Got it. That’s very helpful. Thanks and just wanted to turn towards Transco and there’s a plethora of projects, expansions there, make sure I’ve got them all from….
Micheal Dunn
Keeping — very busy on the Transco opportunities.
Jeremy Tonet
Texas to Louisiana, Energy Pathway, Commonwealth Energy Connector, Southside Reliability Enhancement, South East Energy Connector, all these projects, how do you feel about these projects right now in development, the FERC had proposed something that would have made everything much more difficult and then kind of walked it back. And so I guess curious how you feel about project development and timelines that you’ve set out there?
Micheal Dunn
Yes, I do feel really good about the projects that we have either in front of FERC, or that will be coming there, as you say, FERC did come out with a policy statement that was fairly difficult to understand, first of all, and obviously, they got a lot of backlash, not only from industry, but really from bipartisan elected officials. And very quickly pulled that back. We had a number of conversations with FERC commissioners one-on-one, trying to understand what their intentions were. And I think they had good intentions, they certainly are looking to protect the environment as best they can, and as best they think they’ve been told to do by the courts. But I do think we are seeing a bit more same reaction here now from the FERC, as they pull back this policy statement and re-evaluating where they’re at.
Having said all that, I felt very comfortable that on either the policy statement that they issued or what is coming, we will be able to develop projects under the regime that they are they are intending to go forward with. Our team does a really good job of evaluating the environmental impacts of these projects, we’ve been portraying our emissions to FERC for quite some time now. And giving them the information that they’ve asked for so that they can properly evaluate these projects. So we feel really good about where we’re at in regard to our projects. The bulk of our projects do have some kind of emissions reduction opportunity. And it’s very interesting that we have the Vintage Transco system that we’re working with. And what we do is we try to go in and evaluate a project from an emission standpoint, and look at the vintage compression that’s associated with the existing assets. And we’re, we’re building these brownfield projects, we go in and we configure the new compression to move the additional volumes. But we also are replacing the older compression alongside that at existing stations.
And so that reduces the emission profile of those vintage brownfield emissions dramatically. And it’s primarily a NOx emissions issue. But we also have significant greenhouse gas equivalent emissions that we’re reducing in that regard as well. So we’re taking advantage of the growth projects, and reducing the emissions of our existing operations at the same time.
So I’ll run down a couple of the projects. I’ll try to run them all down, as you expressed, the whole list of projects there, but regional energy access is the big one that we have in front of FERC right now. So we’re awaiting their approval, we’ve got a draft EIS in hand very comfortable with the draft EIS requirements that were embedded in that. We expect a final EIS in July for that project. And then by the fall, we would expect action from the FERC certificate approval. And so that’s an 800,000 a day plus project from a volume standpoint, moving northeast gas volumes into markets in the northeast New Jersey, primarily in Maryland, and a small amount into New York City. But really comfortable with the configuration of that project, the primary permits are required in Pennsylvania, are currently processing those permit applications. And we have a really good relationship with the state of Pennsylvania. I have had no trouble and no challenges permitting our projects there.
No water permits required in New Jersey or New York for that project. And so we think that it will be a very comfortable permitting process there. So that’s our big one that we have in front of FERC. The Southside Reliability Enhancement project is also one that we just made our application in May. This is about a 420,000 dekatherms per day project that would likely come online in 2024. And that one, as I said, we filed in in May.
We have several others that are in pre-filing right now. We have the Commonwealth energy connector, as well as the Southside energy connector. Two projects all told that’s about 250,000 more dekatherms in the southeast U.S. as well as at Mid-Atlantic. And then finally our Texas to Louisiana energy pathway project. This is a South Texas supply push project, bringing gas to the LNG facilities along the Gulf Coast. That one will enter pre-filing very shortly. So a lot of activity going on the Transco system. As you can see, we are very comfortable with the FERC process and the challenges associated with that. Our team has done an incredible job permitting and executing on projects. We’ve had a number of projects come online over the last several years, bringing those online early and under budget.
And finally, we do have an expansion underway on Gulf Stream. So that’s our partnership that we have with Enbridge. That’s the pipeline that goes from Mobile, Alabama in the Tampa Bay area in Florida. And that’s a small project that will come online in the third quarter of this year.
Jeremy Tonet
Got it that’s very helpful. And so you touched on a little bit there but want to go to LNG. It seems like Williams is well positioned to help us facilitate movements and molecules to the LNG export facilities. But would they be interested as well as taking a stake in an LNG such as projects such as leveraging the GeoSouthern production in Haynesville and kind of in, maybe leveraging that into an equity stake in new project or any thoughts on LNG ownership?
Micheal Dunn
Yes, I would say our strategy has been to be the pipeline supplier for the LNG facilities as best we can. So we’ve worked with a number of those LNG facilities along the Gulf Coast as well as the East Coast. So we deliver volumes into the transport system that ultimately end up at Cove Point and Elba, but significant pipeline provider to the Gulf Coast facilities as well. So we’ve really taken that strategy as our opportunity to help supply the LNG facilities. And I would say for Williams, our balance sheet challenges were there for a number of years where we had a pretty disciplined approach to our capital investments. And as you all know, these LNG facilities require a significant amount of upfront capital before you see any revenue from those. And so I think that’s one of the areas that we’ve looked at. But we thought, we’re better suited right now to be the supplier pipeline supplier to these facilities. And not saying that we wouldn’t consider that. But right now, our business development team is looking at opportunities there. But we think we’re best suited to being the pipeline supplier to them, but never say never, in that regard, there are certainly going to be additional opportunities for LNG facilities to be built in the U.S. and Williams will certainly be looking at that now that we have our balance sheet in really good shape.
Jeremy Tonet
Got it. That’s, that’s helpful. And then pivoting towards Appalachia a bit here MVP is kind of a key variable, I guess, for the future of what happens for production there. Just wondering how this impacts Williams, if it does get reach completion, if it doesn’t reach completion? How would you handicap completion?
Micheal Dunn
Sure. Well, I would say first and foremost, I hope Mountain Valley Pipeline gets finished. I think it’s, it’s good for the industry that that pipeline project is allowed to finish. It’s nearly complete. And for us, there’s opportunities either way, the Transco system can be expanded. Once Mountain Valley Pipeline has a concluding point, it really stops right at Station 165 on the Transco system. And we will create opportunities taking away that supply from that area. But if Mountain Valley Pipeline has not finished, we think we’re there are definitely opportunities to continue to build out Transco and we’re actually looking at projects to do that today. For those that are, concerned that Mountain Valley Pipeline may not be finished. And the obviously they’re more expensive than a takeaway project with a completed Mountain Valley Pipeline. But we do think there will be opportunities for Transco either way. And time will tell whether Mountain Valley Pipeline ultimately gets approvals to go forward. But I am very optimistic that certainly in this environment right now we’ll be allowed to complete.
Jeremy Tonet
Got it. Got it, that makes sense. And diving into Appalachia a little bit more I think there’s a couple gathering systems and some other initiatives that Williams is working on there. Can you just walk us through, I guess what’s happening there in these production in Appalachia right now effectively capped [ph] and how does that impact you?
Micheal Dunn
Yes, I would say there’s still take away out of Appalachia, primarily going to the west, out of the Ohio, Southwest, Pennsylvania, West Virginia area. Very, very challenged, fairly challenged, I should say, going to the northeast, as we all know, but our regional energy access project will alleviate some of that. So that’s coming out of Northeast Pennsylvania. So we’ll unlock another 800,000 dekatherms out of Northeast Pennsylvania. Our Leidy South project came online last year that unlocked additional volumes out of Pennsylvania that was over 500,000 dekatherms. So we’re continuing to find these bolts on opportunities to move natural gas out of the Appalachian area. And I think we’ll continue to find opportunities to do that. It doesn’t necessarily mean you have to build a Greenfield bullet pipeline out of there. And I think we and the rest of the industry will continue to find these brownfield expansion opportunities to do that.
I would say right now, as I said earlier, we’ve got a number of expansions underway in our Appalachia gathering systems. We have over 300,000 dekatherm a day expansion underway for Coterra in Northeast Pennsylvania that will come online in 2023. We have about 100,000, dekatherm a day expansion underway in the Southwest Marcellus for another key customer there that will come online in 2023, that’s in the rich gas area. And then a number of expansions underway for Encino, who’s a private operator backed by the Canadian pension plan. This is also in the rich areas in Ohio. And then finally, the Blue Racer interconnect that I spoke about earlier. We expect that to come online here this summer.
Jeremy Tonet
Got it, that’s helpful. And I’d be remiss if I didn’t ask about capital allocation, something that’s always has been topical in recent years for the space and between buybacks, deleveraging and CapEx, how you think about priorities here. Williams had previously talked about the bond spread versus the equity spread, being a factor in repurchases. And so it seems like share repurchases, probably not something we should really expect in the near term, but just wondering if you could walk us through that.
Micheal Dunn
Sure. Yes, I’ll start at the top there. And you’ve heard me mentioned balance sheet a number of times. And that’s really the most important thing for us right now is to maintain our healthy balance sheet. We’ve really worked hard to get there. That was a goal that we established several years ago to dramatically improve our position there. And we have a target to be at 3.8 times debt-to-EBITDA by this year and our guidance and certainly expect to be able to hit that. So that’s first and foremost, our main priority in regard to our capital allocation decisions. So next is our dividend and making sure that we have a healthy dividend. And we continue to grow that in line with our EBITDA growth. And so you’ll continue to see that happen.
Next is our capital investment opportunities, we have a significant number of capital investment opportunities, but we really guide it to be about 1.2 billion per year in growth capital. And that’ll be a little bit lumpy. But on average, that’s where we expect to be over the next several years, depending upon the opportunities that show up like Trace, where we had an opportunity to acquire that. So keeping our balance sheet healthy is important for us to be able to take advantage of opportunities similar to that.
And then, we’ve got our modernization in our emissions reduction program as well that we’ve talked about where we think we can deploy $200 million to $300 million per year there on the emissions reduction program, as well as our new energy ventures organization where we think there’s significant opportunities that are under development there. But really the primary capital investments we’re making there, or the solar projects that we have underway, and very likely we’ll push most of those into 2023. It looks like right now, based on what we’re seeing with panel prices and the tariff dustup that’s been going on the opportunity to acquire panels is pretty difficult right now with the supply chain issue. So very likely, we’ll push some of those out, although we’ve installed some small projects thus far this year.
And then finally, the buyback question is certainly out there. But really for us, it’s keeping our options open and that last tranche of opportunity. So if we do see a pullback in our price such that the yield spread there between our equity and our debt costs, we’ll take a look at that and take advantage of that. But I would just say the top priorities I listed there are really what we’re focused on from the top down.
Jeremy Tonet
Got it, that makes sense. And you touched on energy ventures there a little bit and just wanted to pick up I guess, what do you, what do you see as possible in through your lens there, RNG, carbon capture, hydrogen other how would you rank I guess what could be real near term opportunities versus we’ll see?
Micheal Dunn
Well renewable natural gas is certainly something that we’ve been chasing although it’s a small piece of our business to be to be very clear. We have about 12 to 13 million cubic feet per day that comes into our system from either landfills or dairies. So it’s a very small component of our gathering volumes. Today, our gathering systems capacity is about 24 Bcf. So a very small piece of the business. But we are looking at a lot of opportunities that are out to go out and invest in some of these opportunities, where we would actually go and gather some of this either landfill or dairy gas, but really nothing coming to the forefront there yet. But it’s pretty small investments in that regard.
Hydrogen is something else that we’re looking at. We’re looking at some pilot projects with some of our customers there that are willing to pay for these things. But hydrogen at scale does not make sense today. It’s just not economic in comparison to natural gas, even with natural gas at $9. Hydrogen is still not economic. But there are customers that are willing to venture into this with us. And they would like to see some of that hydrogen placed into our system such that they can take credit for that hydrogen coming into their local distribution companies. And so we’re looking at some small pilot projects there. But we have a lot of people studying that. But for us, it just doesn’t look economic today.
Carbon Capture is another area where we have team looking at a number of significant opportunities there. I think the Haynesville area is an area that would be very ripe for this. There’s a lot of CO2 that’s removed from the gas streams today, that we and all the other gathering and processing systems in the Haynesville play, do today. So we basically pull that CO2 out to our Amine Treating Systems. And then the majority of that is to have [ph] it here today. So it’s already aggregated, in many of these areas. And so there is definitely an opportunity to gather that CO2 and take it to a sequestration point. And so we are definitely evaluating opportunities there, especially in conjunction with our LEG project. And so more to come on that but I do think there will be opportunities for us there.
And then finally, we are looking at decarbonisation as a service with Context Labs, that’s an entity that we partnered with, to look at evaluating the emissions profile of our business. So it’s starting with the upstream through the midstream all the way to the end user. And you may have seen an announcement that Cheniere and ourselves made along with another a lot of other midstream operators a few months ago talking about doing this very thing. And so making sure that we’re being responsible, tracking those emissions, people to quantify those, measure those report on those, and have verification of those emissions is really important today. And so we’re really working hard to find additional opportunities to do that with our business.
Jeremy Tonet
Got it, that’s helpful. And didn’t want to miss the Gulf of Mexico seems like there’s some activity there some a few new projects, just wondering if you could update us on that. And it seems like Gulf of Mexico projects have the ability to be very low in capital, given the system there. So can you touch on that?
Micheal Dunn
We do have a lot of opportunity in the Gulf of Mexico. And there’s actually a lot of activity going on out there. And we’re very well suited to capture that. If you look at our materials, we have about six projects that are very large that are underway right now the Whale project with Shell and Chevron is the biggest, it’s under 500 million of capital investment for us at a very nice return. That’s a pipeline system that we build as well as onshore processing, with the benefit of the producers there. And so we actually will start installing that pipeline system this fall. And very likely we’ll have volumes coming along in 2024 for that project, so that’s the biggest one.
We also have a number of projects on our discovery system, our partnership with DCP in the middle part of the Gulf of Mexico there and on the Eastern Gulf, we have a number of projects underway there, but the bulk of them are the Ballymore project, Anchor project, Salamanca, Shenandoah. Shenandoah does have about a $200 million capital investment opportunity for us there. But the bulk of these remaining projects or tie backs that the producers are spending the capital to bring the pipelines to our systems.
Jeremy Tonet
Got it. That’s really helpful. I think we’re down to our last couple minutes here and so didn’t know if there’s any kind of final thoughts that you want to share with the audience?
Micheal Dunn
Well, I would just say the Williams business is performing incredibly well. Our team is doing a great job finding new growth opportunities, but they’re also doing an excellent job operating the existing business. Our teams are incredibly focused on being a safe, reliable operator. We track all of our safety and reliability metrics, and actually portray those to our customers and make sure they understand what we’re doing for them. It is incredibly important for our industry to be a great operator and Williams prides itself on doing think that. We all have to do our part to make sure that this industry is doing everything we can to operate our business as well, because there is a target on our back. You’ve probably seen the information out there where we’re being monitored from satellites in space for methane emissions. And I think that’s actually a good thing. I have no problem with that whatsoever, because I think that makes all of us better operators, whenever somebody shines a spotlight on a situation that occurred. I think that makes all of us better at what we do, because we know we’re being observed. Now I think Williams has been doing this the right way for a long time. We’ve been monitoring, we’ve been doing leak detection, we’ve been doing these things and not talking a lot about them but doing them and our sustainability report will be coming out here in a few weeks and encourage all of you to read that. You can see all the great things that we’re doing in this space.
Jeremy Tonet
Great. With that I think we are just about right on time to finish. So thank you everyone for joining us. Thank you Micheal for…
Micheal Dunn
Thank you for your time
Question-and-Answer Session
End of Q&A
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