➤ Opposition to gas pipelines in New York could hurt developments such as Amazon.com Inc.'s expansion in New York City, but the politics may be changing.
➤ Williams is more focused on gas supplies in the oil-rich Permian Basin than many peers.
➤ Pipeline companies' financial health is not reflected in market valuations, but continued results should bring back yield-focused investors.
As president and CEO of Williams Cos. Inc., Alan Armstrong has led one of the most prolific natural gas pipeline companies in North America since 2011. Williams had a busy 2018, closing a $10.5 billion deal to roll up its master limited partnership in August and completing a milestone expansion on its flagship Transcontinental Gas Pipe Line Co. LLC system when the Atlantic Sunrise component began service in October. S&P Global Market Intelligence spoke with Armstrong about Williams' outlook for 2019 and the midstream sector's post-MLP future. The following is an edited transcript of that conversation.
Williams Cos. Inc. President and CEO Alan Armstrong called struggling midstream sector valuations a "buying opportunity."
Source: Williams Cos. Inc.
S&P Global Market Intelligence: Now that the company's consolidation is complete, what are top priorities for the year ahead?
Alan Armstrong: Probably our biggest growth area next year is Northeast gathering volumes, and those are really starting to ramp up at the end of this year with the Atlantic Sunrise pipeline now online. ... A lot of activity is going on in the field with the producers right now building out our system to be able to take on their additional volumes.
There are several other projects like the Gulf Connector expansion project, which feeds [Cheniere Energy Inc.'s] Corpus Christi LNG facility ... that has already been partially placed in service, and we're in the process of commissioning the rest of it.
Everyone is talking about the Permian Basin, and production shows no signs of slowing down. Can you explain the strategy behind Williams' partnership with Brazos Midstream Holdings LLC and what it is like to compete for projects down there?
The Permian represents a low-cost supply from the gas side, and we want to make sure that we are keeping the Transco network expanding and able to pick up supplies not only from the Marcellus and Utica [shales] but from the Permian as well. ... Our angle is quite a bit different from most of the typical Permian midstream players out there because we really are trying to integrate on the gas side, and so our focus and our interests are perhaps different from our peers.
Our experience with private-equity-backed companies like Brazos Midstream has been a positive experience because we have got great operating capabilities and our assets are in prime locations, and there are a lot of synergies to be extracted from growing our business. ... Clearly, the private funds today are much lower-cost [sources of capital]. Their yield expectations are lower than the public markets are, and so we've been finding ways to partner with those firms. ... We have so many growth opportunities in our portfolio that need to be funded, and we see them as a good source of that funding.
Williams is no stranger to pipeline permitting challenges, particularly in New York state. With so many projects in process, do you see that regulatory environment changing in 2019?
There's a lot of need for gas supply into the New York City market. There's a lot of development that's trying to occur, and local distribution companies that we serve like [National Grid PLC] and [Consolidated Edison Inc.] don't have any incremental supplies to offer, so if a business like Amazon moves into the area and wants to be assured that they are going to have adequate gas supplies ... [the utilities] are not really in a position to be able to say "yes" to that today. That is becoming more and more evident to state and local politicians.
We're really starting to press on the fact that here we have these great emissions-reduction opportunities in these markets, and yet the extremists are really blocking the public from being able to enjoy the benefits of that. ... There continues to be a small but very noisy voice that's prohibiting these very important economic projects from being developed today. We think that's going to turn around as people really face the facts.
With companies ditching the MLP model and valuations down across the board, the midstream sector saw a lot of changes in 2018. Is this a problem, an opportunity, or both?
Certainly in the short term, it's a problem, but in my history in the space, companies have never been healthier than they are today, both from a dividend-coverage and a balance-sheet perspective and their ability to self-fund themselves. That's a very strong combination compared to the MLP structure that was dependent on the public equity markets being open ... and today, most of the big companies like Williams are not relying on those markets in any shape or form.
It's very surprising to me seeing those stock prices today, but ... it's not compounding the way it was back in 2016, when the major players with big projects had to fund them either by overleveraging themselves with debt or having to issue public equity in the form of MLP units. ... It was a downward spiral.
I think we'll look back on the current situation and say, "Wow, what a buying opportunity across the whole space." I don't recall a time in my years in executive management when the business has been this healthy but the equity markets so poorly reflecting that. I'm looking forward to those investors taking advantage of it being rewarded.
If the traditional MLP model is done, what is the value proposition for investors now? Will energy pipelines still be a field for income investors seeking yield, just without the pass-through tax status?
There's a bit of confusion, I would argue, in the market today between who's exposed to crude oil prices and who is not. It's interesting to see [share prices] like Williams' continually go down with crude oil prices when we have very little exposure to crude, and so it's kind of surprising to see everyone lumped together in that regard. I think it will work its way out. I think the earnings will show who is exposed and who isn't, and I think that'll be proof in the pudding in terms of this commodity exposure. But today ... there doesn't seem to be much distinction.
Our cash flows have never been higher-quality than they are right now, but I look around the industry and I think our peers are pretty healthy, too. My hope is that people stick to doing what they said they're going to do when it comes to earnings, because I think that is going to attract long-term yield investors.
What is the biggest shift you have seen during your time in the industry?
The biggest shift is the United States' ability to extract natural gas out of the ground at a lower cost. ... Out of industrialized areas, we clearly are the lowest-cost when it comes to gas production, and that's come from tremendous efforts in technologies. ... If you think about all the petrochemical businesses we brought back to this country, it really is on the backs of the exploration and production companies.