When Michael Grande was cutting his teeth as an energy analyst at Standard & Poor’s Ratings Services, he thought the Tulsa, OK-based Williams Cos. Inc. a takeover target as its credit ratings were languishing below investment grade. That was 2007, though. Today, Grande, now director of S&P’s utilities and infrastructure group, has a different take on the company after watching it closely the past eight years.
It was a different Williams he and other analysts were talking about last year when the midstream behemoth was gobbling up Access Midstream Partners LP in a $6 billion phased acquisition. Some in the industry called it a “monster deal,” and officials inside the company said it made Williams a “natural gas powerhouse,” doubling its gathering volume to more than 11 Bcf/d.
Williams structured a deal in which it first acquired half of Access in one phase with an option to acquire additional interest in a second phase. In December 2012, Williams paid $2.25 billion to private equity fund Global Infrastructure Partners (GIP) for ownership interest in Access. Williams and GIP each owned 50% interest in Access with a right-of-first-offer on the sale of each other’s interests, which Williams exercised in 2014.
Last October, Williams’ master limited partnership (MLP), Williams Partners LP, and Access agreed to merge the two MLPs into one entity. The merger of the two MLPs was expected to close in early 2015.
Williams used the acquisition to transform Williams Partners LP into a large presence in the midstream space. Senior company officials characterized the move as a chance to provide a clear pathway for growth in what some have dubbed a “super cycle” for U.S. energy expansion. The merged Williams Partners carries adjusted 2015 EBITDA approaching $5 billion.
The combination of Access’ strong focus on natural gas gathering with Williams Partners’ broader service offerings is designed to yield what Williams’ CEO Alan Armstrong last year described as “even more robust growth opportunities.” Additionally, he touted the fact that the people at both partnerships bring “valuable skills, experiences and best practices that will strengthen the combined partnership’s ability to execute and grow.”
At the end of 2014, Platts’ Global Energy Awards in New York City recognized Williams for the “strategic significance and successful closure” of the Access Midstream acquisition, awarding it the “Deal of the Year.” From Williams’ viewpoint, the merger advanced its strategy “to connect the best supplies to the best markets” by allowing the expanded organization to provide even more service and market options to customers.
“At one time, Williams was probably a takeover target because they weren’t growing,” said S&P’s Grande, noting companies like Energy Transfer Partners, Enterprise Products, Kinder Morgan, and others were potential acquirers. “Before Kinder bought El Paso, Williams was in the mix,” he said. “It was all just rumors, but they needed to grow, and in hindsight, they subsequently got into the Marcellus and that made all the difference.
“They did a couple of acquisitions, and then they really began to grow again. This was even before they bought 50% of Access. They established a strong gathering and processing position in the Marcellus. That is where they are putting a lot of their capital now.”
At the beginning of 2015, Williams was entering the third year of a five-year capital expenditure program approaching $10 billion. Three large-scale projects – expansion of its Geismar (LA) ethylene plant, an offshore floating production system, Gulfstar One in the Gulf of Mexico, and Keathley Canyon Connector pipeline in the Gulf – were mechanically wrapped up at year-end 2014, and Williams officials estimate collectively they will be producing up to nearly $1 billion in cash flows in 2015.
According to Williams’ officials, the company finished 2014 on a roll, despite falling global oil prices that languished in the mid-$50/bbl range at year-end. They claimed strong customer interest in new major natural gas infrastructure projects, such as the Transcontinental Interstate’s (Transco) Appalachian Connector pipeline from the Marcellus and Utica plays into Virginia and the Diamond East pipeline in Pennsylvania. Both are designed to tap into the continuing abundant and competitively priced Marcellus and Utica gas supplies.
In the regulatory arena in the fall of 2014, Williams gained Federal Energy Regulatory Commission (FERC) approval of a final environmental impact statement for its 124-mile Constitution Pipeline project extending from Pennsylvania to connect with the Iroquois Gas Transmission and Tennessee Gas Pipeline systems in Schoharie County, NY.
“We’re pursuing the federal and state permits we need in an effort to begin construction as early as the first quarter of 2015,” a Williams spokesperson told P&GJ last December.
The early 2015 construction start is critical in bringing Constitution into service in time to meet the winter 2015-16 heating season in New York and throughout New England, said Tom Droege, a Williams spokesman. In deciphering a wealth of information from Droege it is easy to see how Williams has a distinct Northeast and Southeast focus these days, with 13 separate projects alive between the Gulf Coast and New England, approaching $5 billion by 2017.
Williams sees continued increased U.S. demand for gas from local distribution utilities and power generators. Simplified, its strategy is to get more supplies to what it calls “the highest-value markets” by providing large-scale natural gas and natural gas liquids (NGL) infrastructure. The economic and logistical barriers to do this are relatively few, but the regulatory hurdles continue to hamper efforts for U.S. energy infrastructure to keep pace with the nation’s new-found domestic energy boom, Williams executives keep reiterating.
“As an industry, we stand ready to respond to the challenge and opportunity created by the shifting supply,” Droege said. “However, the biggest impediment is the lack of a more coordinated, synchronized and simultaneous review process by federal agencies, and for the states where authority has been delegated, to permit new energy infrastructure.”
Williams and others in the industry contend that it takes a relatively long time to navigate the regulatory hurdles required to place new pipe in the ground. The FERC process is about a 3- to 4-year timeline, they said.
“It’s critical that we modernize the federal infrastructure permitting process, getting more timely decisions while improving driving accountability and transparency,” said Droege.
Besides the regulatory hurdles, Wall Street analysts note Williams and its competitors in the midstream space face commodity price exposure tied to the NGL business and from the longer-term domino effect from sustained low global oil prices. S&P’s Grande estimates 25-30% of Williams’ cash flow may be tied to commodity prices, noting the prices of a lot of products made from NGLs are tied to crude oil prices, meaning when crude prices drop, NGL prices follow.
“It is also more difficult to hedge NGL prices, and it can only be done for relatively short [six-month] periods,” he said, adding that for MLPs this can be even tougher because financial markets are not always open to MLPs facing commodity price pressures.
“Those are challenges faced by everyone, and no one knows what the future holds for prices,” said Grande. “A company in the position that Williams is in today can certainly ride out the periods of volatility like this. It depends on how long it is.”
The second challenge is the domino effect from oil price slides causing oil and gas producers to cut back, but Grande is sanguine about that eventuality, noting “that doesn’t necessarily equate to a credit problem. [Companies like Williams] should be able to weather a commodity price decrease given their credit-risk profile.”
But analysts say to fully assess Williams future prospects, the Northeast U.S. shale boom has to be factored in because Williams has been operating in Pennsylvania for over 50 years, long before anyone talked about the Marcellus Shale. The Transco pipeline has been moving gas from the south to the north for decades, but since the early 1980s, production in the Gulf of Mexico has steadily declined.
“Today, we have reached a tipping point in which more natural gas enters our system in Pennsylvania than the Gulf,” said one Williams veteran. “The Marcellus has emerged as a giant in the U.S. natural gas market.” Late 2014 Marcellus volumes totaled 13 Bcf/d, accounting for about 20% of the U.S. daily supplies, up from just 2% a few years ago.
By 2020, Williams expects the Marcellus to provide up to 64% of the nation’s gas supplies. S&P’s Grande said Williams officials have been talking about spending up to $30 billion over the six-year period of 2014-19 with the majority aimed at the Northeast and pipelines more generally.
In a state of the American energy address early in 2015, the American Petroleum Institute CEO Jack Gerard cited an IHS Consulting Group study predicting that filling the essential needs for new and replacement energy infrastructure over the next 10 years could amount to $1.15 trillion, and require 1.5 million new jobs to complete all the work.
For the most part it would involve private capital expenditures, Gerard emphasized, adding, “This level of projected investment eclipses the pending federal highway bill in Congress.”
Williams is right in stride with these macro-projections on a companywide basis, staking its future to developing and operating large-scale natural gas and NGL infrastructure. Officials at the company emphasize the shale revolution has generated huge infrastructure demands, and in response Williams spent $1.2 billion in the Northeast in 2014 for gathering and processing expansion projects.
“On the transmission side, Williams is pursuing more than $3.3 billion in proposed pipeline expansions on our Transco pipeline system in the Northeast that eventually will add about 3 Bcf/d of pipeline capacity by 2017,” Droege said.
What began as gas gathering, process and transportation operations in the Marcellus in 2009 when Williams bought Laurel Mountain Midstream LLC involved about 150 employees at the time. Today, Williams employs over 750 people in the area, working to help develop the Marcellus and Utica shales.
This recent growth presents more opportunities to continue the upward trajectory, according to some analysts watching the ascent. And these add-on opportunities don’t take into consideration the fact that Williams has substantial gathering/processing infrastructure, according to Grande. “It is not the focus of the group, but it is important, and they also have Northwest Pipeline Co. in the Pacific Northwest, as well as gas gathering down on the Gulf Coast.”
Setting aside the early 2015 shock waves from the global oil price dive, it is easy to conjure up a clear path and unfettered future for the Williams infrastructure machine, but realistically knowledgeable people within and outside of the company recognize there are still risks and uncertainties. Technology advances have permitted the shale revolution and that in turn has created the demand growth for companies like Williams, but many of these midstream operators are not innovators, per se. “They are efficient operators,” one analyst said.
Williams people will say that the company maintains an extremely robust information technology program that combines state-of-the-art technology with the best practices of the industry. It keeps their pipelines and other infrastructure operating reliably and safely, and that is where the midstream earns its keep.
Midstream operators like Williams maintain that natural gas demand will continue to grow, and with it, federal and state regulators will naturally want to closely oversee the continuing rapid growth. Whether there can be a balance between the two is still up for debate.
“The need for additional energy infrastructure will continue to be there as long as our customers’ need for gas continues to increase,” Droege said. “These large-scale infrastructure projects take time, but we work very hard to meet our in-service dates. The biggest challenges are out of our control.”
Overall, though, Williams has given no indications in recent years that it does not intend to continue to meet whatever hurdles are presented.
Richard Nemec is a Los Angeles-based West Coast correspondent for P&GJ. He can be reached at: email@example.com.