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This 8.5%-Yielding Natural Gas Stock Continues to Prove Its Durability Amid the Storm

While 2020 has been a brutal year for the energy sector, some companies have been more immune to the turbulence than others. One of them is natural gas infrastructure giant Williams Companies (NYSE: WMB), which recently reported reasonably solid third-quarter results despite the challenging market conditions. It's still on track to achieve its full-year forecast, which means its high-yielding dividend remains on a solid foundation.

Drilling down into Williams Companies' third-quarter results

Metric

Q3 2020

Q3 2019

Year-Over-Year Change

Adjusted EBITDA

$1.267 billion

$1.274 billion

(0.5%)

Distributable cash flow

$772 million

$822 million

(6.1%)

Dividend coverage ratio

1.59

1.78

(10.7%)

Debt-to-EBITDA ratio

4.42

4.47

(1.1%)

Data source: Williams Companies.

Williams Companies earnings were remarkably stable while its cash flow only dipped slightly during the third quarter as it benefited from its diversified natural gas infrastructure platform:

Data source: Williams Companies. Chart by the author.

Earnings from the company's transmission and Gulf of Mexico assets declined by 8.5% during the third quarter. One issue is that the company benefited from a rate case adjustment last year at its main Transco pipeline. When combined with some hurricane-related impacts, these issues more than offset the benefit of recently completed expansion projects.

Earnings from the company's gathering and processing assets in the Northeast jumped 15.5%. Fueling the strong quarter was record gathering, processing, and natural gas liquids (NGL) production volumes in the period.

Finally, earnings from the company assets in the western part of the country increased by less than 1% thanks to lower operating and administrative costs, which more than offset weaker revenue.

Overall, Williams generated enough cash to cover its dividend by a comfortable 1.59 times. That enabled the company to retain a large portion of the money needed to fund its capital projects, improving its leverage ratio slightly.

Image source: Getty Images.

A look at what Williams Companies sees ahead

Williams Companies' solid showing in the third quarter has it on track to achieve its pre-COVID guidance ranges for the year. As things currently stand, it expects to deliver adjusted EBITDA in the lower half of its $4.95 billion to $5.25 billion guidance range. Meanwhile, it anticipates that distributable cash flow will be toward the midpoint of its $3.05 billion to $3.45 billion forecast range. That would give it enough money to cover its 8.5%-yielding dividend by 1.7 times, leaving it with nearly $1.2 billion in excess cash.

Meanwhile, the company did trim its growth spending range from $1.1 billion-$1.3 billion to $1 billion-$1.2 billion because of the continued weakness in the oil and gas market. Given the company's projected excess cash flow, it can cover most, if not all, of this amount. That will enable the pipeline operator to maintain a solid balance sheet as leverage should fall to an average of 4.4 times debt-to-EBITDA this year.

Looking further ahead, Williams Companies expects its adjusted EBITDA to grow next year as energy market conditions improve, and it completes more expansion projects. As a result, it expects to generate free cash flow after covering its dividend and capital spending.

The company's main near-term growth driver will continue to be additional natural gas infrastructure projects. However, it's starting to capture some renewable opportunities, including plans to complete a solar energy project next year. The company set an ambitious goal to reduce its carbon emissions by 56% by 2030 from its 2005 level. It intends to do by growing in renewables and embracing emerging opportunities in clean energy like hydrogen.

Proving its resiliency

Williams Companies' cash flow has proved to be very durable this year mainly because of its focus on natural gas infrastructure, which hasn't experienced as much impact from lower oil prices as some crude-focused assets. The company is still on pace to achieve its initial full-year outlook. As a result, it's generating more than enough cash to support its high-yielding dividend, making it a solid option for dividend investors these days.

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Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.


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