Williams Companies, a major natural gas infrastructure player, has seen its stock pull back recently. But analysts at RBC Capital Markets think the dip could set the stage for a stronger third-quarter narrative, especially now that a key acquisition has closed.
Momentum Midstream deal closes
RBC notes that Williams' acquisition of Momentum Midstream closed in early September, earlier than some had expected. That timing matters because it means the deal's contribution will show up in the quarter's results, providing a small boost to earnings.
The investment bank raised its estimate for Williams' third-quarter adjusted EBITDA—a measure of operating profit before interest, taxes, depreciation, and amortization—to $2.04 billion from $2.01 billion. That implies roughly $40 million of added profit from the deal.
Adjusted EBITDA is a common metric in the midstream energy sector because it strips out non-cash items and gives a clearer picture of cash-generating ability. For investors, it's a way to compare performance across companies that may have different capital structures.
What's next: new projects and long-term contracts
RBC's bigger focus, however, is on what comes after the earnings report, which is scheduled for November 2nd. The firm expects Williams to announce a “Power Innovation project” before year-end and thinks the company could unveil at least one more project with a new customer.
These potential announcements are significant because they could come with long-term contracts. RBC argues that if these projects are backed by 15- to 20-year agreements, the market may start paying more attention to the durability of Williams' future cash flows rather than just a single quarter's beat or miss.
Long-term, volume-backed contracts are a hallmark of the midstream business model. They provide revenue visibility and reduce the risk that cash flows will fluctuate with short-term commodity prices. For a company like Williams, which operates pipelines and storage facilities, such contracts can make earnings more predictable and lower the perceived risk for investors.
Why the contract structure matters more than a one-time boost
One quarter of incremental profit from an acquisition is relatively easy for investors to model and, over time, to take for granted. What can move valuation more is the structure of new contracts. Long-term agreements tend to make a midstream company's cash flows look steadier, which can lower the perceived earnings risk.
That matters for how investors value Williams around the November 2nd Q3 report and for how cheaply the company can finance its backlog of growth projects. A lower perceived risk can translate into a lower cost of capital, making it cheaper for Williams to fund expansions.
In other words, RBC's $2.04 billion EBITDA forecast is the baseline, but new long-dated project contracts are the potential catalyst that could change how the stock is priced.
What it means for investors
For everyday investors, the key takeaway is that a single quarter's earnings beat or miss may not be the most important thing to watch. Instead, the focus should be on the quality and duration of the company's revenue streams.
If Williams announces projects with 15- to 20-year contracts, that could signal a more stable and predictable business, which might support a higher valuation over time. Conversely, if the quarter's numbers are strong but no new long-term projects are announced, the market's reaction could be muted.
It's also worth noting that Williams' stock pullback could be seen as an opportunity by some investors, but it's important to remember that past performance is not a guarantee of future results. As always, do your own research and consider your own financial situation before making any investment decisions.
For more on how companies in the energy sector are navigating similar dynamics, you might find our coverage of consumer stocks split or McCormick's price hikes interesting, though they are in different sectors.
