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Morningstar | Williams' Results Meet Expectations, but Large Barnett Impairment a Reminder of Past Mistakes

Williams' fourth-quarter results and outlook met our expectations, but we're disappointed to see another massive $1.85 billion impairment against the company's Barnett gathering assets as a result of widening Permian gas differentials. With significantly higher associated gas production in the Permian alongside increased oil production, gas production in the Permian is takeaway-constrained at the moment, at least until Kinder Morgan's Gulf Coast Express comes on line in the second half of 2019. This shift has caused Williams to re-evaluate its long-term revenue estimates associated with its Barnett assets, as essentially it looks like this gas is being pushed out of the market, resulting in the asset impairment. Broadly, we think this speaks to the challenges related to acquiring gathering and processing assets and valuing the intangible customer agreements as part of the deal, which require assumptions over 20 years if not more, but also more simply the competitive difficulties in the gathering and processing space. There also remain write-down risks with the Constitution pipeline and Discovery assets as well, in our view, given their challenged outlooks, as we believe Williams' management team can be overly optimistic. We don't expect a material change to our $28 fair value estimate or narrow moat rating.

Aside from the asset impairment, results generally met our expectations. Adjusted EBITDA was $4.6 billion for the full year, meeting our own forecast, and unchanged 2019 EBITDA guidance of $4.8 billion-$5.2 billion brackets our own $5 billion forecast. Given Williams' new project announcements, including an agreement with Targa for a variety of natural gas liquids pipeline projects linking Conway, Kansas, and Mont Belvieu, Texas, and carryforwards from unspent 2018 projects, revised 2019 growth capital spending of $2.7 billion-$2.9 billion looks reasonable, and we will update our own forecasts.

Williams should benefit in 2019 from numerous Transco projects recently placed into service, including the 1.7 billion cubic feet per day Atlantic Sunrise and the Gulf Connector, and we consider it quite positive that Transco recently generated record volumes on Jan. 21. With leverage at 4.8 times, the firm remains very focused on reaching its 4.2 times target; we estimate it will need about $1.5 billion in further asset sales to reach the target in the next few years.