Williams Companies
Williams (WMB, Financial)—a leading U.S. midstream energy company—has a diversified portfolio of assets and operates large best-in-class natural gas pipelines, handling approximately 30% of all U.S. natural gas volumes. Demand for natural gas and oil has faced significant macroeconomic and structural headwinds. Following the recent global commodity slump, oversupply has led to substantial oil and natural gas price declines, which has weakened the financial profiles of Williams’ producer customers. One of Williams’ key customers (Chesapeake Energy) declared bankruptcy in June. This was a well-known risk that we had already incorporated into our risk-reward profile for the company, and we believe it is reflected in its current valuation of only six times cash flow.
Partnering with our fixed income credit analysts, our equity analysts assessed the durability of Williams’ core pipeline business, the likelihood of producer shut ins, and the degrees of protection in Williams’ long-term contracts with its clients. We have also conducted extensive due diligence through conversations with Williams’ management team, key customers, midstream peers/competitors, industry experts, and rating agencies.
Going forward, we believe the company has considerable sources of downside risk mitigation: high quality assets, a disciplined, shareholderoriented management and board, a healthy liquidity position with an improving balance sheet, and solid cash flow to support its dividend payments. Williams’ well-positioned pipeline network should also benefit in a stabilization/recovery scenario where natural gas demand normalizes. We believe Williams is an attractive investment opportunity over our three- to five-year investment horizon.
From Dodge & Cox Stock Fund's semi-annual 2020 shareholder letter.
