The move by Tulsa-based Williams Companies to form a joint-venture to expand operations in the Delaware Basin of West Texas and southeastern New Mexico gets the attention of investment advisers.
Seeking Alpha found it interesting since Williams had divested some of its assets in the Basin in 2017.
Here’s what the New York City-based market counseling firm had to say about the move:
Going over the implications of Williams Companies Inc. forming a joint-venture with privately-held Brazos Midstream.
Why this is a strategic shift for Williams Companies Inc.
All about Williams Companies Inc. re-entering the Delaware Basin after largely exiting the region last year.
Williams Companies Inc. (NYSE:WMB) recently made an important announcement that could be seen as a possible sign that management’s strategic priorities for the company are changing. On November 15, 2018, Williams Companies Inc. announced it was forming a Delaware Basin-focused midstream joint venture with privately-held Brazos Midstream. This deal is particularly curious as Williams Companies Inc. divested a large chunk of its Delaware Basin operations just last year. Let’s dig in.
Before going into the details and implications of the deal, a brief history is needed to understand why this transaction may signal a strategic shift in Williams Companies’ long-term goals. Note that natural gas production, along with oil and natural gas liquids production, is skyrocketing upwards in the Permian Basin and that this is creating a lot of opportunities for midstream players.
Last year, Williams traded its non-operated 50% stake in a Delaware Basin gas gathering system for $155 million in cash and a larger stake in several midstream assets up in Appalachia. Western Gas Partners LP (NYSE:WES) took the other side of that trade, as it is the operator of the Delaware gas gathering system. Readers should note that in a separate deal, Williams divested its 33% stake in Ranch Westex JV LLC (which owns a gas processing plant in the Delaware Basin) to Anadarko Petroleum Corporation (NYSE:APC) and Energy Transfer LP (NYSE:ET) for $45 million in total cash considerations.
After these divestments, it appeared Williams Companies didn’t want to join its midstream peers in the Permian bonanza. The Delaware Basin and the Midland Basin are the two most prolific sub-basins within the Permian Basin, and Williams had just walked away from that upside to pursue lucrative opportunities elsewhere. It isn’t clear what Williams Companies still owns within the Permian Basin beyond a modest gas gathering footprint in the Delaware Basin and a very small gas gathering presence in the Midland Basin (its 2017 10-K offers little details on its remaining assets in the region).
During Williams’ latest quarterly conference call, management noted that the company’s Transco system has been getting a lot of interest from marketers of Permian gas supplies (whether that be the actual upstream natural gas producers, third-party marketing teams attempting to generate upside via arbitrage opportunities, or major industrial buyers seeking cheap long-term supplies). The Transco network is a massive system of natural gas pipelines with bi-directional transportation capabilities that runs from the East Coast down to the Gulf of Mexico.
However, Permian gas supplies must first utilize third-party systems to travel from West Texas/SE New Mexico over to Southern/Eastern Texas’ Gulf Coast region to reach the Transco network. The Transco network stretches across East Texas and parts of Southern Texas but doesn’t carry on to West Texas.
Management commented that Williams had no interest in building a long-haul gas pipeline from the Permian to the Gulf Coast in light of several firms already doing so (which is on top of existing regional pipeline takeaway capacity);
“Two [Permian pipeline] projects… have been sanctioned so far [that will add] 4 Bcf a day of takeaway capacity. So, that does, I think, provide some relief in the basin in the near term. But I will also say that those projects had a variety of different investors and I would also say risk-adjusted returns that wouldn’t really look attractive to us when we look at our opportunities for investment…
There is additional need for takeaway over time. But we also want to make sure that we don’t participate in any overbuild coming out of the basin…
I would say though that even if we don’t, in the near term, participate in building a pipe from the Permian to our Gulf Coast assets, we’re seeing a lot of interest in those volumes wanting to get to the Transco system and deliver into markets along our footprints. So, we will participate in moving Permian gas through to Transco markets one way or another and, like I said, we’ll continue to look for opportunities to build that larger infrastructure.”
It appears that Williams Companies wants to profit off of the Permian boom, but didn’t entirely know where to begin due to the firm not having a serious presence in the play. This is why Williams decided to enter into a JV with Brazos Midstream.
Williams is offering up its modest gas gathering footprint in the Delaware Basin for a 15% stake in the combined entity, with Brazos Midstream keeping the remaining 85% stake along with the operatorship. Almost all of the assets being contributed are coming from Brazos Midstream, with Williams contributing dedicated acreage, a very modest amount of gas gathering infrastructure, and cheaper sources of financing.
Brazos Midstream is offering up its 725-mile-long natural gas gathering network, its 75-mile-long crude oil gathering system, two crude storage terminals with 75,000 barrels in combined storage capacity, the 60 MMcf/d Comanche I gas plant (60 million cubic feet per day of natural gas processing capacity), the 200 MMcf/d Comanche II plant, and the Comanche III plant that is under construction. When completed, the Comanche III plant will have 200 MMcf/d of capacity (targeted for early-2019 start-up). This midstream infrastructure is supporting production across 500,000 acres in the Delaware Basin that are dedicated to the partnership.
Where the partnership gets really interesting is on the issue of future developments. It is possible Williams Companies will put up a larger share (than 15%) of the capital required to build new gas processing plants, for example, in return for a larger equity stake in the JV. Another interesting possibility is on the gas residue side of things. The press release stated;
“As part of the transaction, Williams and Brazos have also entered into an agreement to jointly develop natural gas residue solutions to further benefit Delaware Basin producers.”
This implies building pipelines capable of transporting residue gas (natural gas ready for end use) from cryogenic processing plants in the Permian Basin to out-basin markets. However (assuming my interpretation of that statement is correct), this conflicts with the sentiments management offered up earlier on the 2018 Q3 conference call, that Permian pipeline projects aren’t yielding competitive returns compared to its other projects.
It is possible that Williams is interested in building Permian pipeline infrastructure, but only if it can also realize the various synergies at both ends of the pipeline. One of those synergies includes being able to generate organic growth opportunities at ease. If Williams and Brazos Midstream build a new pipeline takeaway option for Permian gas production, that JV would most likely also want to capitalize on the need for additional gas gathering and gas processing capacity as well via growth developments in the Permian.
A lot more information is required on this subject, but it appears Williams Companies Inc. wants to get in on the Permian boom and that the company is seeking to establish a material presence in the basin before embarking on an ambitious Permian pipeline project. That signals a very significant shift in Williams Companies Inc.’s long-term goals when it comes to what part of America’s midstream space the company wants to invest in. Readers should keep a close eye on any updates concerning Williams Companies Inc., the Brazos Midstream JV, and the Permian Basin over the coming months. Thanks for reading.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.