The U.S. petroleum renaissance is gaining steam as more hard-to-reach fossil fuels come online. The FT outlined the nature of the production increase in a Jan. 7th article:
The government’s Energy Information Administration predicted on Tuesday that the US oil boom would continue, driven by rising production of shale oil unlocked by advances in horizontal drilling and hydraulic fracturing or “fracking”.
The EIA forecast that in 2015 US oil output could approach its record high of 9.6m barrels per day, reached in 1970.
Adam Sieminski, the EIA’s administrator, said: “The growth in domestic production has contributed to a significant decline in petroleum imports.”
The share of total US liquid fuels consumption met by net imports is expected to fall to just 24 per cent in 2015, down from 60 per cent in 2005.
Given that broad trend in the domestic energy industry, I’ve been searching for potential beneficiaries aside from simple exploration and production companies partially dependent on higher commodity prices.
The Williams Companies (WMB) is sort of the toll booth of the energy industry, building out the transportation and processing infrastructure that allows the fuel products to get where they’re needed. Here’s the company’s own description:
We are an energy infrastructure company focused on connecting North America’s significant hydrocarbon resource plays to growing markets for natural gas, natural gas liquids (NGLs), and olefins. Our operations are located principally in the United States, but span from the deepwater Gulf of Mexico to the Canadian oil sands, and are organized into the Williams Partners, Williams NGL & Petchem Services, and Access Midstream Partners reportable segments. All remaining business activities are included in Other.
The shale gas revolution has offered more significant opportunities, as WMB has built out or is in the midst of building out pipelines from various new production areas to the transportation and storage hubs (primarily in the southern U.S., near the Gulf Coast). Investors have gotten excited about the future potential of the infrastructure build-out, and the stock is now very close to a new all-time high:
The stock has not traded above $40 since 1999. We’ve noted in several TMO posts over the past month the increasing call activity in WMB, particularly for the Jan18th 40 strike calls, as traders watch that breakout level as well.
What about the detailed fundamental picture for WMB?
Fee-based businesses are a significant component of our portfolio. As we continue to transition to an overall business mix that is increasingly fee-based, the influence of commodity price fluctuations on our operating results and cash flows is expected to become somewhat less significant.
NGL margins were approximately 42 percent lower in the first nine months of 2013 compared to the same period of 2012 driven by reduced ethane recoveries, as previously mentioned, coupled with lower NGL prices and higher natural gas prices. However, our average per-unit composite NGL margin in the first nine months of 2013 has increased slightly compared to the same period of 2012 as the relative mix of NGL products produced has shifted to a greater proportion of higher-margin non-ethane products.
WMB EV/EBITDA ratio, Courtesy of Bloomberg[/caption]
WMB’s ratio is at a 10 year high. Analysts point to the different macro backdrop, future growth opportunities, and transformed business structure in explaining this valuation. But I’ll take the numbers over analyst rationalizations any day of the week.
WMB is an interesting business, but the stock is far from interesting at current valuations. The stock’s technical setup looks interesting as it approaches all-time highs, but I’d rather sell the stock than buy it here all things considered. If the stock pulled back to the low 30’s it becomes more intriguing.