Williams Companies’ commodity price exposure
Many analysts believe that the earnings of midstream companies don’t have much direct commodity price exposure. Larger companies like Williams Companies (WMB) and Kinder Morgan (KMI) and smaller ones like Crestwood Equity Partners (CEQP) and EQT Midstream Partners (EQM) seem to have relatively low commodity price exposure.
WMB’s stock price and crude oil (USO) had a correlation coefficient of 0.41 over the past one year, while natural gas (UNG) and WMB have a correlation coefficient of 0.01 for the same period. A correlation coefficient close to one indicates a strong relationship between two variables. WMB’s high correlation with crude oil reflects its high NGLs (natural gas liquids) exposure. At the same time, its low correlation with natural gas reflects its fee-based natural gas midstream businesses.
~93% of Williams Partners’ (WPZ) 3Q16 YTD (year-to-date) gross margin was from fee-based sources. Williams’ commodity exposure is expected to fall following recent announcements like its Transco expansion, its Canadian assets sale, and its sale of the Geismar Plant. The asset sale could result in lower NGLs and olefins exposure.
Williams Companies’ indirect commodity exposure
Midstream companies are indirectly exposed to commodity prices through production levels. If crude oil and natural gas prices stay low, upstream producers might cut their production or even go bankrupt, which might result in lower throughput volumes, lower earnings, and higher counterparty risk. Williams’ throughput volumes have been negatively affected by production-related shut-ins in some regions including the Eagle Ford and Barnett Shale.
Williams lowered its counterparty exposure after it restructured its contract with Chesapeake Energy (CHK) in the Barnett and mid-continent regions. Now, CHK accounts for ~15% of Williams’ total revenue.