Q2 2021 Williams Companies Inc Earnings Call
Yeah.
Good day, everyone and welcome to the Williams second quarter 2021earnings Conference call Today's conference is being recorded.
At this time for opening remarks, and introductions I would like to turn the call over to Mr. Daniela Giovanni Vice President of Investor Relations. Please go ahead.
Thank you Michelle and good morning, everyone. Thank you for joining us and for your interest in the Williams companies yesterday afternoon, We released our earnings press release on the presentation that our president and CEO, Alan Armstrong and our Chief Financial Officer, John Shanda will speak to this morning.
Also joining us on the call today are Michael Dunn, our Chief operating Officer, Lynn Wilson, Our general Counsel and Chad's Ameren, our senior Vice President of corporate strategic development.
In our presentation materials, you'll find a disclaimer related to forward looking statements.
This disclaimer is important and integral to our remarks and you should review it.
Also included in the presentation materials on non-GAAP measures are reconciled to generally accepted accounting principles and these reconciliation schedules appear at the back of the day presentation materials, so with that I'll turn it over to Alan Armstrong.
Great and thanks, Danilo and thank you all for joining us today.
Our long term strategy of connecting the fastest growing natural gas markets with the best supply areas continues to deliver solid financial results.
As demonstrated by our strong second quarter financials across our key metrics are stellar results. This year were supported by equally strong fundamentals that demonstrate our sticking to this strategy has put us in an enviable position.
As evidenced Williams gas gathering volumes grew 6% in the first half of 2021, while the U S. As natural gas production volume actually declined by 4% continuing to prove that our assets are in the low cost basins.
We expect a constructive natural gas macro backdrop to continue to drive significant value for our business recent.
Commitments to Transco market area expansions, coupled with producer commentary on Transco projects, such as our Leidy, South and regional energy access projects are clear pathways to growth for our northeast gathering volumes for years to come.
We will Ralph we will walk through more details of our business in just a moment, but I wanted to first call attention to our 2020 sustainability report, which we just published last week.
As this report details we are making headway on critical ESG related fronts. For example, becoming the first North American Midstream company to set a near term climate goal based on right here right now emission reduction opportunities and making steady progress on developing our leaders for the future.
We're also looking to the future as our nationwide infrastructure footprint is well suited and adaptable to renewable energy sources like clean hydrogen and RMG blending.
<unk> ongoing focus on sustainable operations positions us well to meet clean energy demand for generations to come in fact, we are now up to 7 renewable natural gas sources flowing into our gas transportation systems, and we have 9 more that are in progress.
I hope you can find from time to visit our website and read our new sustainability report, but right now let me turn things over to John Chandler for a review of our <unk> and year to date results John Thanks Alan.
High level summary of the quarter benefited from nice increases in profitability from our northeast gathering systems and uplift in revenues on our Transco pipeline from new projects that have been put into service over the last year and contributions from our upstream operations into 1 center.
The positives were offset somewhat by slightly higher operating expenses, resulting from increased incentive compensation expenses reflective of the strong performance that is unfolding this year and.
And you can see the strong performance on our statistics on this page in fact once again, we saw improvements in all of our key financial metrics.
First our adjusted EBITDA for the quarter was up $77 million or.
4.6% and.
And we have seen a 9% increase in EBITDA year to date we.
We will discuss EBITDA variances in more depth in a moment.
Adjusted EPS for the quarter increased 2 cents a share or 8%.
<unk> grew for the quarter similar to our growth in EBITDA.
<unk> is essentially cash from operations, including JV cash flows and excluding working capital fluctuations.
If you put our year to date <unk> of $1.948 billion up against our capital investments year to date of $737 million and our dividends of $996 million, we generate have generated about $250 million of excess cash year to date.
Included as a side note included in the capital investments is about $160 million on maintenance capital.
Also you can see our dividend coverage based on <unk> divided by dividends is a healthy 196 times year to date.
This strong cash generation and strong EBITDA for the quarter, along with continued capital discipline has led to our exceeding our leverage metric goal, where we currently set at 413 times debt to EBITDA.
You'll see later in our guidance update on this debt that we've moved our guidance for the year from being around 4.2 times by the end of the year to now less than 4.2 times debt to EBITDA for the year.
So really strong performance for the quarter and the year and the fundamentals are set up for a good second half of the year.
So now, let's dig a little deeper into our EBITDA results for the quarter.
Again Williams performed very well this quarter, our upstream operations added $19 million of incremental EBITDA. This quarter and this EBITDA was entirely from our <unk> upstream acreage remember that we owned at the BP once that our acreage the entire quarter, but only on the south letting acreage for 1 month during the quarter.
Production from the combined 1 set of assets totaled $6.9 Bcf for the quarter. The haynesville upstream acreage produce very little EBITDA given it has only a small amount of PDP reserves and therefore, it will take some time before we see new production and therefore, new EBITDA coming from these assets now.
Now moving to our transmission in Gulf of Mexico assets. They produced results that were $31 million more than the same period last year.
New transmission pipeline projects added $25 million on incremental revenues versus the second quarter last year, including the southeastern Trail project that went into service during the fourth quarter of last year as well as a portion of the Leidy South project that also went into service in the fourth quarter of last year.
And you can see this evidenced in the growth in our firm reserve capacity, which is up 5% from the second quarter of 2020.
In addition, our Gulf of Mexico revenues were at somewhat due to less shut in issues compared to the second quarter of last year. In addition, commodity margins from processing volumes for processing in the Gulf of Mexico gas were up about $5 million due to higher NGL prices and higher volumes.
These revenue increases were offset somewhat by a slight increase in operating expenses again, mostly due to employee related expenses, a large part of which can be attributed to higher incentive compensation accruals.
The northeast G&P segment continues to come on strong contributing $46 million of additional EBITDA this quarter.
Collectively totaled northeast gathering volumes grew 750, Mcf, a day or 9% this quarter versus the second quarter of last year, while processing volumes grew 33% and set a new record.
The volume growth was predominantly at our Jv's, Nebraska supply hub, where we benefited from a gathering system expansion on that system in late 2019 and at our Miss out on Marcellus South supply basin, where we benefited from more productive wells on larger pads and just to be clear because we do not operate blue racer midstream those volumes are not included in our.
Statistics.
As a result of this volume growth, though our EBITDA from our equity method investments improved by a little over $36 million.
Which also includes the benefit of additional profit that we do receive from Blue racer midstream due to the additional ownership we acquired in mid November last year.
Now moving to the West G&P segment, it was down $21 million compared to the prior year. However, remember that first we did agree to reduce gathering rates in the haynesville in return for receiving upstream acreage and Thats south of Nashville area of the Haynesville.
As I mentioned, we are not yet seeing the benefit of those upstream asset, but we have just named an operating partner to begin developing that acreage.
The impact of the gathering rate reduction was about a negative $15 million for the quarter in.
In addition, this quarter, we also saw $9 million less EBITDA due to a deficiency fee that 1 O paid as last year related to oppo, which allowed them to pull volume that they had otherwise committed to oppo last year.
<unk> does not have that volume obligation to <unk>. This year and therefore, we did not see the deficiency revenue this year.
And finally, we did see a $9 million decline in deferred revenue from our Barnett shale gathering assets, which is a noncash step down in revenues.
So other than those 3 negatives, namely the lack of deficiency revenue on oppo, the haynesville rate decline in the deferred revenue step down in the Barnett, our west assets, where otherwise up $12 million versus the second quarter of last year and this is in large part due to higher NGL margins were once again on our commodity marketing group is realizing more profit from Alan.
NGL prices.
And while our overall gathered volumes on the west were down about 3.5% versus the second quarter of last year. This was more than offset by better gathering rates were in the Piceance and Barnett our contracted gathering rates are influenced by commodity prices.
So now moving to year to date results.
Year to date, our results show growth of $230 million of EBITDA or roughly a 9% growth in EBITDA driven of course by the impact of winter storm Yuri in the first quarter and by many of the same positive factors that I, just mentioned affecting second quarter growth.
Combined between our commodity marketing activities and our upstream operations in the <unk> Center Winter Storm here had a combined positive impact of $77 million.
In addition, our upstream operations otherwise have added an additional $27 million year to date.
Our transmission in Gulf of Mexico assets are up $22 million year to date or about 2% better with this increase being driven was driven largely by additional transmission revenues from new projects that have been put into service.
And incremental revenues from Gulf of Mexico assets, largely due to lower downtime this year versus last year.
These positives were partially offset by lower revenues from 1 less billing day on our regulated transmission pipelines and higher expenses were last year expenses were delayed.
Due to Covid and because this year's expenses again are higher due to higher incentive compensation expenses, resulting from our strong performance.
Our north G&P assets are up $78 million almost entirely driven by profit from our JV investments, namely from the Bradford supply hub gathering system.
And our Marcellus South gathering systems.
In addition, we benefited from the increased ownership on Blue racer midstream.
In total gathering volume for the northeast are up 10% versus 2020, while processing volumes year to date are up 24%.
And then finally on the West <unk> is up $23 million versus year to date last year and this is on top of the $55 million that we earned from winter storm here the.
The $23 million increase is driven by higher commodity margins and slightly lower operating costs offset by lower Barnett deferred revenues lower haynesville gathering rates, which were exchanged for upstream acreage and lower oppo deficiency revenues that I just mentioned in my remarks otherwise.
Otherwise, we did see a 5% gathering volume decline year to date, but that again was more than offset by mvc's and higher gathering rates again I mentioned in my second quarter remarks.
Again this is stacking up to be a very good year for us I will now turn the call back over to Alan to cover a number of key investor focus areas Alan.
Great well, thanks, John and we're moving on here to the key investor focus areas here on slide 4.
First of all regarding our financial expectations, we are on track to generate EBITDA closer to the high end of our guidance range that we just increased at the last earnings call. The <unk>.
Resilience of our business has supported our financial results and helped US recently overachieve against our previous leverage metric goal of 4.2 times.
As a result, we recently received a moody's upgrade to <unk> and now have a triple b equivalent credit rating amongst the 3.
T rating agencies, our free cash flow outlook for 2021 remains intact.
And in fact, the long range plan unveiled during our most recent board strategy session forecasted continued steady growth in EBITDA and continued improvement in our credit metrics importantly, our long range plan also shows that even after funding. These many growth opportunities our business is poised.
2 to generate significant excess free cash flows that will support a robust and multi faceted capital allocation approach that will enhance returns for our shareholders, including the potential for opportunistic share buyback. So stay tuned on this front.
Next looking at our recent transactions and project development.
First of all the upstream jv's.
Great effort on the organization here as we announced last month, we were able to finalize on upstream joint venture with Crow heart in the warm Center basin consolidating our legacy BP Southland and CRO heart upstream assets into 1 contiguous footprint of more than $1.2 million acres.
So as we've mentioned before this acreage was <unk>.
<unk> divided and checkerboard at out here and so being able to consolidate these assets in a way that it can be developed at a low cost is really critical to the value of the upstream business and important to us to the midstream business.
Taking advantage of the latent capacity, we have out there today.
And just recently, we Inc to joint venture with Geo Southern in the Haynesville that provides us with the following benefits from.
It unlocks significant midstream value for Williams through Geo Southern's obligation to develop the south Mansfield acreage under this agreement Geo Southern will carry a portion of our drilling cost and we will earn increased ownership in the leasehold as they deliver on agreed to development milestones.
Second it provides williams with the opportunity to optimize all over the natural gas production in the area through fixed fee agreements marketed by our sequencing business.
And third with the South Mansfield being in close with South mental being in close proximity to Transco. It provides williams with future development opportunities, including the ability to source and deliver responsibly sourced natural gas into the growing LNG market.
Importantly, both of these recent JV has improved the value proposition in the warm Sutter and the Haynesville basins as we're partnering with well positioned high performing local operators and the deals required the development of the properties driving volume to our midstream and downstream assets.
From a project execution standpoint.
We continued to deliver on multiple fronts, including bringing online key projects such as Leidy, South which is on track for an early in service.
Now before the winter heating season, and importantly, transco growth opportunities remain highly visible and we've recently received customer commitments for 2 new market expansion projects in the mid Atlantic region.
Transco also has ample runway to provide additional low risk growth through rate based modernization projects.
In the deepwater Gulf of Mexico, We continue to highlight the great growth continues to show force out here and we've recently reached definitive agreements for both the Shenandoah and well projects. These will contribute to significant EBITDA growth beginning in 2024.
And then finally on sustainability.
I mentioned, our sustainability report at the top of the call and we also filed our carbon emissions disclosure with the carbon disclosure project last week I'll, just add that we continue to leverage our natural gas focused strategy and today's technology to deliver on immediate opportunities to reduce emissions.
At the same time natural gas and our infrastructure are enabling the next generation of clean energy technologies the.
The next wave of renewable power generation generation will be up against 2 key constraints, both the transmission and the storage of energy.
No other energy infrastructure system integrates a reliable delivery network into critical population centers with a massive storage solution on the scale that natural gas transmission does we believe our infrastructure can be a critical part of both near and long term solutions.
We continue to advance our solar projects that were announced last year and I am pleased to share that we have 6 projects now awaiting approval from the grid operator with another 10 ready for the same regulatory approval by the end of 2021.
In total the 16 projects amount to about $250 million on Capex. It should start to generate cash flows beginning in 2023, and we have another approximate $150 million of these similar projects that are under development.
We are looking forward and anticipating future innovations and technologies that we can use on our key energy networks to deliver on our country's clean energy future.
And in fact in a partnership with the University of Wyoming, We recently awarded a $1 million. We were recently awarded a $1 million grant from the state of Wyoming to fund a feasibility study that would evaluate the creation of a green hydrogen hub near our operations in Wyoming and this really is another example.
Of how we continue to leverage our existing assets and footprint to drive clean energy solutions.
And the warm center, we now have $1.2 million acres dedicated to our midstream assets through the CRO heart JV, but in addition to that we have about 200000 acres, where we own or control the surface rights, which we intend to leverage for clean energy development.
So in closing I'll reiterate that our intense focus on our natural gas based strategy has built a business that is steady and predictable with continued growth improving returns and significant free cash flows. This has translated into a strong balance sheet and are well covered and grow.
<unk> dividend.
Our best in class long haul pipelines Transco northwest pipeline on Gulfstream are in the right place and the Wright markets and by design, our formidable gathering assets are in the low cost basins that will be called on to meet gas demand as it continues to grow.
We remain bullish on natural gas because we recognize the critical role it plays and we will continue to play in both our countries and the world's pursuit of a clean energy future.
Natural gas is an important component of today's fuel mix and should be prioritized as 1 of the most important tools to aggressively displace more carbon intensive fuels around the world.
Our networks are critical to serving both domestic and global energy demand and a lower carbon and economically viable manner and with that I'll open it up for your questions.
Ladies and gentlemen at this time, if you would like to ask a question. Please press star followed by the number 1 on your telephone keypad again, it is star 1 well pause for just a moment.
Your first question comes from the line of Jeremy Tonet JP Morgan.
Hi, good morning.
Good morning, Jeremy.
Just wondering if you could start off a bit expanding on your thoughts on the current.
Gas macro outlook and whether that backdrop drives the higher end of guide expectation how does this position your trajectory into 2022 at this point.
Yes, sure Jeremy as you know the.
The pricing run up that we've had more recently and the continued.
Demand growth is is really starting to obviously.
Pressures on kind of wake up the forward markets a bit.
And certainly we are seeing responses from our producers.
Looking to take advantage of that the area that I would say that we will see kind of the quickest response too is probably the haynesville and tremendous amount of drilling activity that is gearing up in the haynesville right now, but as well you heard you probably follow the comments from Cabot.
On their earnings call.
Strong response, there to price there as well and of course in the.
Southwest Marcellus and in the Utica as well, we're really seeing pretty strong response across all those areas. So I think it is important to note that this is not just a production issue demand continues to grow.
And so if youre looking at <unk> comparisons.
Seen against the 19.
<unk>, we saw demand grow by 9% and against a <unk> of 'twenty.
We saw growth of 5.6 <unk>, sorry, yes about 5.6% so.
Continued really strong growth going on on the demand front end.
Obviously price seeing prices respond to that but I think from our perspective as we've said all along it really is demand that is going to drive our business and price will fluctuate as required to balance that but it really is this demand continued steady demand growth that we're continuing to see and obviously as we saw last year.
We don't expect.
The COVID-19 on a resurgence of Covid really to have any impact on that were continuing to see steady healthy growth.
Coming on the natural gas market, so as we look into 'twenty 2.
Hard to predict what gas demand will continue to do but right now certainly the fundamentals are looking strong and we are seeing.
Healthy producer response.
Got it that's helpful. Thanks for that.
And I realize I'm, probably getting a little bit ahead of myself here, but as it relates to buybacks just wondering whether Williams is authorized to buy back plan and if not what would it take to authorize it and as you think about.
We're going to pursue buybacks would something just generally opportunistic in nature and make the most sense or something systematic where percentage of cash flow could be applied to that.
Given year just wondering.
At this stage what your thoughts are on on buybacks from those perspective.
Yes, Jeremy Thank you might as well get this out of the way on new that question on discounting so.
So.
Square up on this.
So first of all we did have a really.
Important discussion with the board last week, and I think probably what was most remarkable about that was the degree of free cash flows that continue to exist on top of funding growth capital.
On top of continued deleveraging that comes with that growth in EBITDA.
And.
And being able to fund.
Both rate based investments and new energy venture investments, allowing for all of that.
We still are showing pretty significant excess amount of free cash flow.
And.
And so I think thats, probably the biggest takeaway in terms of a program. We are in the process of detailing that out with our board and putting some specific parameters around that but I can tell you that the recommendation will be that it will be somewhat opportunistic, but it will have some.
Framework to it in terms of what appropriate pricing levels and what those drivers will be and I can tell you from my perspective that will likely be a multiple of wherever our debt is trading at.
And.
If you think about that.
Our debt has continued to stayed very steady while stock prices whipped around.
And certainly there will be those times, where the market runs into it scares like we saw in.
March and April of last year, but.
But in reality that the debt markets have been very steady and yet prices whipped around quite a bit and so we think that will point to when the right.
Opportunities are to acquire stock so it will have parameters around it it won't just be.
Perfect it wont be random and it will have parameters around it in both in terms of size and the drivers for that we likely won't announce those specific multiples on them.
Debt multiples, but that is how we're thinking about it right now and we will be announcing we do intend to I should say announced the program. Once we get the details of that squared away with their board and Jeremy.
On self evident here, but at what Alan is really referring to is our dividend yield relative comparison to where our debt trades. Thank you John.
Got it that's very helpful. Thank you.
Your next question comes from the line of Cheniere Giussani with UBS.
Hi, good morning, everyone.
Maybe just to follow up on Jeremy's question, there a little bit.
Alan in your prepared remarks you.
Common out there about how your projections to the ports, so steadily increasing EBITDA and.
<unk> steadily declining love range.
Should we think about this is there's a new leverage target.
That needs to be achieved or should we think about it as this excess cash flow is going to a component of it is going to go towards leverage reduction. So we will continue to decline.
And then a portion will be available for the buybacks, whether it's 50.50.
Or to be opportunities.
The way, we should be thinking about this from trying to square those comments together.
Well.
I think the easiest way to think about it sooner is that we.
With our EBITDA continuing to grow and we hold our debt where it is obviously that metric continues to improve and so really should think about it in that fashion.
And.
And so that's the primary driver of that improved credit metrics and I would just say that we will be able to balance that and make decisions on that as we see fit through the process, but.
There is so such a significant amount of excess cash flow.
Coming off that we really feel like we can hit all of those.
Things that wed like to in terms of both continued dividend growth.
Continued credit metric improvement.
Investment in on a rate base.
And in driving earnings through investment in on our rate base and new energy ventures, we can do all of that and we still have pretty significant firepower left for.
4.
Share buybacks when the opportunities right. So really the message we are folks ought to be getting is that free cash flow is very significant and it allows us to invest in all of those measures to continue to drive shareholder value.
No I appreciate the clarification there.
Maybe to pivot a little bit I was recently reading your sustainability report.
Were talking about evaluating hydrogen and you sort of talked about that a little bit here.
I'm, just wondering where you see Williams role in the hydrogen type change because you talked about both blue and green and in the comments there.
Do you sort of see William is really just in the transportation aspect of it and is that where you expect to invest.
Will it be on the.
The reaffirmation side or do you actually see yourself participating capital wise on the electrolysis on just trying to get a sense of how youre thinking about it because as I sort of think about your position in the haynesville. It kind of seems like a blue hydrogen strategy would be very interesting where you can.
Participating on creation and in the transportation and industrial centers on the Gulf Coast. So just kind of curious of where you feel Williams will be let's say in 3 years to 5 years from now on the hydrogen strategy.
Yes, I would just say.
And I'll, let Chad Zamin follow up with some comments here if he likes but.
I would just start and say that what will be most.
Obvious to you is that we're going to invest where we have competitive advantages around our assets and so obviously that points to transportation, but we do believe that in places like Wyoming, where we've got such big landmass.
<unk> and.
And we have transportation and we have the processing capabilities in the system is already set up.
We don't think Thats, a stretch for us to at least study so.
A couple of things 1 it is going to we're only going to be doing it where we're making decent returns and that means that we're going to have to be using competitive advantages to get returns that are over and above kind of what the market's allowing today on that kind of investment.
And then.
Secondly.
You should think about it in terms of us always making sure that we're not leaving an opportunity.
Where we have a competitive advantage, we're not going to let 1 past 5 so so we're not letting any we're not going to be taken any strikes at the plate.
<unk>.
And making sure that as we see opportunities there.
That.
That we're attacking those very quickly so chad on.
You might add to that.
<unk> said it in your remarks, we operate.
An incredible energy transmission and storage infrastructure, and we're very focused on ensuring that that infrastructure is part of the solution for the next generation of energy and so that's our primary focus.
I would say it's early in the days of hydrogen and we are working with the hydrogen production.
Side of the equation to ensure that it can be economic in that it can drive volumes to our infrastructure. So I think we will participate in a small way initially to ensure that that.
That technology develops in a way that complements our infrastructure and then we'll evaluate whether or not.
We would invest on an ongoing basis, we're working on that you mentioned the haynesville, we permitted our regional energy access project in a way that we.
Defined as compatible with hydrogen blending and we're working on a hydrogen project a pilot project on.
Our regional energy access project that will.
We will involve us participating in the production on hydrogen it'll be a very small scale, but it will demonstrate that we can leverage our infrastructure and we will earn an attractive return on that kind of investment we're looking at that across our entire footprint and as that scales up I think it will be exactly what Alan said it'll be do our strategic.
Capabilities and assets provide us with an advantage in should we leverage that advantage into investing in hydrogen production or just be prepared to support that development and drive those volumes to our our assets and infrastructure, but I can tell you where we're looking at it and we're at the table across our footprint to make sure that we're.
Driving forward the right solutions to support our business.
Okay.
Really appreciate all the detail. Thank you very much on that.
Have a great day.
Thank you.
Yes, I have a question from the line property from me pardon me.
<unk> with Wells Fargo.
Thanks.
Good morning, So now that you've executed on 1 side or on Haynesville JV. So I was just wondering if you could help.
To help provide some clarity into the incremental midstream EBITDA you could pick up in.
In 'twenty, 2 and 'twenty 3 versus the upstream cash flow that's lost.
I guess I'm, just trying to figure out how accretive these transactions will be.
Yes.
Let's start off with <unk>.
They are surprisingly powerful anytime you start.
Adding volume to late to mostly latent capacity in an area that obviously comes on fast.
So theres not any midstream permitting facilities are sitting there ready to go. So it is very powerful and that's why we've been so focused on this so I think we're all very excited about that I'll, let Chad speak to kind of the metrics on on what we look like for growth in those areas on the meter and I'll give you a little more color on the haynesville structure.
But I think it will help.
Yes folks derived how much value, that's going to contribute but which.
Southern who were thrilled to announce that partnership there well proven operator with a long track record of successful development and with Geo Southern there is a drilling commitment of over 400000 lateral feet that day.
It will be pursuing.
And you think about our acreage is highly contiguous and you'll see a map there's a map in our appendix that shows how it's complementary with Geo southern's footprint, So theres a lot of.
Long lateral inventory at very economic.
<unk> and so we expect them and Theyre incentivized there are there are.
If they don't meet those drilling commitments, but beyond that we expect them to outperform the drilling commitment because it's highly economic opportunities.
And as they perform the initial economic splits have geo southern at 30% of the economics Williams at 70% of the upstream economics, but.
They will carry us our capital for upstream development up to a cap cap of $50 million and once that cap is achieved they will revert to having 75% of the upstream economics and Williams will have 25% of the upstream economics. So theyre highly incentivized to continue that development to give you an idea of how powerful that is for our midstream.
<unk> that development, we would expect to drive.
Somewhere around 4 to 500000 <unk> a day of volume to our midstream assets, that's incremental volume to from from what we have today and that ramp occurs relatively fast over the next 18 months to 24 months and all of that gas is committed to our midstream systems at a fee of.
32.
For gathering and treating and as Alan mentioned that is primarily available capacity that will be.
Extremely high margin for us and on top of that we then have the ability to market that gas.
Drive that gas towards downstream opportunities, including integration with Transco, we talked about marketing through our newly acquired sequined platform, we're going to be working on a wellhead to water responsibly sourced gas solution that we can offer to customers and so just the base business alone. There is a lot of value to be driven to our <unk>.
<unk> asked.
Assets in that area and if you do the math it will rapidly outpace what we gave up.
From a from a fee.
<unk> perspective with Chesapeake.
And so that gives you a kind of a picture of the Haynesville into 1 center similar structure, a little bit different because it's a very big very big asset that we were working on and again thrilled with CRO heart as our partner they have been in the basin for several years. If you look at the map in our appendix you can really see the industrial logic again partnering.
Partnering with <unk>, and we put together over 1 million acres of now contiguous acreage and.
And with <unk>, there is a drilling commitment of over 500000 lateral feet.
As we have announced there is a 70.525 ish percent initial split with Crow heart at 75% weighted to 25%, but as they achieve performance across that 500000 lateral feet of development they have the ability to.
Earn up to a 50.50 split.
And so they are highly incentivized to drive volume growth and in the <unk> Basin again, we have latent capacity, that's very high margin gathering and processing, that's dedicated to us we gather and process for approximately 60.
<unk>, so very high margin.
Business in that basin, and we have today around 300 million cubic feet a day of volumes that system has over 700 million cubic feet a day of capacity.
On top of the gas gathering and processing.
We are now having we have dedicated all of the Ngls to Williams at a fixed margin to Mount Bellevue pricing, So, we don't where commodity price risk and we cover significant revenues for overland pass pipeline for bluestem on our downstream partnership with targets. So that hopefully gives a little bit of color on how those will.
Drive value to our midstream and downstream assets.
Maybe just to give you a couple of numbers here real quick because the Haynesville is debit the lumps out of the <unk> Center has very significant PDP today.
And we're at the Haynesville acreage doesn't so we'll need to be drilling that up to produce the midstream value and the upstream value and that will really start coming on in 'twenty, 2 and really into 'twenty 3.
Net <unk> on the other hand, with net gas prices being quite a bit higher is significantly paying for itself.
Not going to give you exact numbers here, but I can tell you what we paid for the south for the for the acreage from Southland Ian from BP will be completely paid for it in less than 2 years.
With where we see gas prices interest PDP production and of course that development will occur and youre going to see meaningful EBITDA uplift coming in the future beyond 2022, as the wells drilled on that production comes on so.
On the warm set or you can even get a sense of the return on there just simply because of the PDP production on the gas prices will return on capital in a very significantly on a very short timeframe.
On the Haynesville as we look at total MPV value, Yes, we did give up rates with Chesapeake in the northern part of our system. They are bringing more rigs to work.
And.
That part of the system, but the value of that acreage as it's developed when we look at that we'll give you the exact number but when you look at NPV tens the value generation is.
At least $300 million actually higher than that over over the life of this net a combination of the upstream value and the midstream value uplift from this from the SaaS management language.
Well John.
I think also a great example of creating a win win for us and our customer Chesapeake has been able to increase activity. When we this time last year Chesapeake was still not running rigs in the haynesville with the fee reduction that we that we offered they now have free rigs running in their spring ridge area and so the fee.
<unk> has incentivize significant activity that will show up on its own as incremental earnings over time, but also as John mentioned, the South Anfield transaction, we see that is virtually tripling the value of that of that give that from an NPV perspective, so really with Chesapeake made the pie much larger.
And we were both able to benefit from that transaction.
Great Super helpful. Thank you.
Kind of switching gears for a second.
I was wondering if you could comment broadly on the RMG business I know in the past you've been a little reluctant to invest in the actual R&D facilities, but now some of your peers are are moving more aggressively into the space. So I'm just curious whether your views our strategy on R&D have had changed at all thanks.
Yes. This is Chad again.
I think we've said that we are willing to invest in R&D.
Aggregation and processing if it makes sense from an economic perspective and again.
Similar to what we talked about 100, we have a strategic advantage we have been looking at our footprint. We've been identifying sites that have potentially attractive economics from an RMG capture processing and delivery perspective, we think that that opportunity set is attractive economically but relatively small in scale we've talked about.
On a couple of hundred million dollars of potential investment.
Have a few projects that we are evaluating bill.
We could.
In the actual.
Aggregation and processing of those volumes the projects that we've done so far has primarily been just interconnects into our existing infrastructure, but.
The technology required for those investments is relatively straightforward I will say, it's 1 of the areas that we look at that is heavily dependent upon.
L CFS credits and returns and that is an area, where again, we're going to be disciplined in our investment we're not going to.
Develop our entire business strategy around areas that require heavily subsidized economics, and so I think there's a place for it where we can drive significant value because of our strategic footprint.
And I think we can invest at a level that's modest.
And we will and I would tell you because of those CFS credits on the dependency on on those credits we're identifying those opportunities in areas, where we would have pretty rapid payback of those investments so very attractive returns.
<unk>.
US with the confidence in those structures.
John I would just chime in on.
<unk>.
Supplement to comment on the subsidies, there and certainly the Lcs and the low carbon fuel standard and the rents are really the big driver in those projects and if you start looking at the weight.
On the Lcs program to California in particular.
I think that's something we certainly are going to be paying attention to is the degree of sustainability of some of these credits and subsidies that are out there and making sure that we're not over investing against that risk. So it's not say that we won't find ways to monetize that on the front analysts somebody else to take that risk, but I do think that is.
Our risk or keeping your eye on given the.
If you add up all over the various.
Projects, where there's 2 carbon capture on on ethanol low debt thats, putting on there and the load that R&D starts to put them on there it starts to be a pretty big number. So I think that's an important thing to keep your eye on as an investment.
Great. Thank you.
Your next question comes from the line of Christine Cho with Barclays.
Thank you.
Maybe if I could just get a clue.
Verification on on the leverage.
What is on long term ownership percentages for both Haynesville and 1 center.
What sort of timelines are we thinking about and how should we think about how to upstream on contributions are factored into all that cash calculation is <unk> still the right target and is there any change to how the rating agencies view that.
I don't think Theres any change I would just tell you Christine net.
The metrics are coming down again pretty naturally.
And the cash.
Cash flow start to roll from the upstream to the midstream pretty rapidly over the next 3 years and so.
It does it takes a little bit longer on the warm side or the development of the Haynesville, It's pretty quick so it rolls over to that pretty quickly and certainly the rating agencies are well aware of our strategies and design on how we do.
Get there so China got anything to add no I think thats right.
But again the haynesville, but both deals are designed by both boat structures in the Haynesville and once they are designed for us to reduce our interest and as Alan pointed out the warm centers such as more sizeable position your interest would be bigger for longer there.
And so whether that.
Ultimately.
Transfer to our partner or gets bought out who knows we don't have a long term it tends to be in the upstream business and intend.
To do this to drive value of the midstream so not sure exactly how that once they are ultimately play out over the long term in the Haynesville pretty clear that day.
As long as the drilling curves like we expect as Alan said on it 2 or 3 year timeframe on it converts over to midstream value.
In the meantime on our credit metrics are so strong right now on our coverage of our dividend and coverage of cash flows.
We've talked to rating agencies about this.
I don't sense, a concern at all about it okay, but again, but again as Alan pointed out in his opening comments.
We do see growth coming in our business from EBITDA, which creates a natural deleveraging and allows us to do a lot of incremental things.
Addition to what we're doing today and still see those metrics degree so and rating agencies I've seen numbers that show that as well.
Yes.
It is a good question I think to really understand how that transitions. If you look at the cash margin that we make.
On the midstream side versus the cash margin on.
The E&P side you can see.
That there is so much value driven to the to the cash flows on the midstream side and Thats really what makes this work and kind of transitioning transitions us out of the.
Upstream piece of it into the midstream cash flow is pretty quick so as we've said all along our goal is to get those developed rapidly.
And get to cash flow is moving on that.
In the Haynesville that's for.
Shorter term issue in lumps that are that's a longer term issue just because it's such an enormous deal.
That is going to be providing.
And it has such a tremendous amount of inventory.
In that in that area, so, but it really is the cash margin optimist screen business that is really powerful for us our cost side of that doesn't move very much at all on the midstream side, but but.
Cash flow to go up pretty dramatically.
Okay.
Got it and then if I could just move over to the northeast your processing volumes jumped quite a bit there quarter over quarter do you guys benefit from some short term volumes as a competitor outage or is that a new run rate we should go off.
No Christine this is Michael.
Those outages that occurred there were very short lived in.
Ironically, we were both the big operators up there, we're having some operator challenges at the same time that were quickly resolved. So we didn't really benefit nor did our competitors at that same day.
But I would say it is a new run rate for us just because our own growth DXP 3 projects came on line.
In the first quarter and obviously, we have filled that up in the second quarter and are running at full tilt there on our ODM processing the most part.
And so we are looking at opportunities to interconnect with our blue racer facilities.
And take advantage of some potential latent capacity that they may have but there is an opportunity to round Robin a lot of gas there you are.
All facilities, our <unk> facility that we acquired couple of years ago as well as the blue racer facilities now.
We are going to take full advantage of but I would say, we're seeing very active producer activity up there from EQT in southwestern as well as he knows a private operator.
Our chasing those liquid rich.
Pad drill outs right now and that's why we're seeing a lot of activity there really pleased that our processing capacity is now full.
Thank you.
Your next question comes from the line of Tristan Richardson with <unk> Securities.
Hey, good morning, guys.
Really appreciate all the comments around board level capital allocation, but just thinking about the cash flow build next year against some of the project opportunities you've talked about particularly rate based investment the new energy projects awaiting approval on Gulf of Mexico.
Should we think.
Capex in 2022 could look similar to this year as some of these opportunities kickoff and dollar start to be put to work.
Yeah.
Simple answer is yes.
The 1 of the things Thats driving capital expense. This year has been some of the upstream acquisitions as well as the sequent acquisition and so we've had some acquisitions that have.
Are still included in that range that we've put out so that's driving this next year.
Leidy South will be completed.
In fourth quarter of this year.
Most of the capital spending obviously will occur prior to that and then.
As we get into next year.
Hopefully, we will start spending towards the end of the year on regional energy access.
If we're fortunate on the permitting process most of that spending will be in 'twenty 3.
But in addition to that as we get into 'twenty 3 the spending per whale, we'll hit as well. So it's looking pretty level is frankly with this year being driven.
A little bit higher than we would've expected with some of the acquisitions that we've done.
But next year.
Continued expansion in a lot of these projects.
We've mentioned so.
<unk>.
Looks like a pretty relatively steady run at kind of the current rate.
Capital.
Capital spending.
John I appreciate it I'll just say the math is obviously pretty straightforward. If you look at our if you just use our guidance midpoint as a starting point other than capital and it will be at the higher end of the range on capital.
We're generating we're spending let's say $1.2 billion at the high end on expansion capital 500 million on maintenance. This year. So thats $1.7 million still deleveraging next year, we see EBITDA growth, we're not giving explicit guidance on that today, but yes.
If you think about it.
If we just put a 4 times multiple against any EBITDA growth that still allows for deleveraging from a $4.1 3 level today.
So any kind of reasonable amount of EBITDA growth add substantially on top of that $1.7 billion that we're spending this year. So that's what you heard this kind of confidence on our part that we have got it.
We see EBITDA growth coming in with that comes in and obviously an expansion of that invest investable cash capital.
Bill, allowing for deleverage from a ratio standpoint.
No I appreciate it John on its helpful. And then I guess just a quick follow up on on really from the acquisition opportunity set.
You guys have talked about capital allocation across capex, and the balance sheet and even the potential for repurchase.
Curious on asset packages out there we've seen some activity in transmission and storage over the past year are there small bolt on opportunities out there either in the northeast or in the west.
Are the things that are attractive or even <unk> when you look out across the landscape.
Yes.
I would say, we certainly keep our eyes on that and so far I think folks that are more.
Dependent on those acquisitions for growth are making those acquisitions and so.
From our vantage point, we've got better.
<unk> opportunities right now than that and hopefully that will continue for a long period of time, we certainly certainly looking that way right now, but but I think that's kind of what's driving that market right now is whether people have growth or not and for us we have.
Substantial growth within our.
Investments that are better return opportunities than what we've seen the broader M&A more at auction M&A market produced right now so we'll certainly keep our eyes open, but it's going to be deals that where we have a tremendous amount of synergies.
That can make those.
Investment opportunities compete with our.
Our other investment opportunities, including share buybacks as well so so all of those go into that calculus, but.
Right.
We've.
Demonstrated that we're going to be very patient.
And we're going to do deals that that are where we are competitively advantaged to get a much higher return than the broad market would be able to realize.
Thanks, Alan I appreciate the perspective.
Yeah.
Your next question comes from the line of Spiro <unk> with credit Suisse.
Hey, good morning team.
Alan first 1 for you in the past you've expressed interest and willingness to work with the current administration on energy transition and emission and Scholes curious what receptivity receptivity you've had early on and demonstrating natural gas his role on the transition.
And what you see is maybe still some of the hurdles are areas, where there is a gap of opinion on how you approach reducing emissions over the long term.
Yes, I think it's an interesting time right now because.
There is this.
Big drive to everybody is.
Very focused on emissions reduction.
They're starting to be a sobering, if you will on a realization of what that means from a cost standpoint to consumers.
And as a result of that people are kind of pivoting back to okay, well, what is sensible and and what can we do that makes sense.
<unk> entered.
The likes of Senator mansion with a great focus on natural gas for the benefit of the state of West, Virginia and for our country and jobs I would say.
And its strong recognition on his part.
That we.
We have to do this in a in a globally sustainable manner and it has to be economic otherwise, we're just shipping jobs and industry off to other countries.
And so.
I would just say there's kind of a.
Reconciling going on if you will between and no pun intended there by the way.
The tweet.
Between the.
Okay.
The.
Intense focus on on carbon reductions in tackling that issue on the 1 hand and on the other issue doing it in a way that it actually is sustainable and we as the U S can stay in control of our own destiny.
From a from an economic perspective, and so I think I think natural gas is extremely well positioned as those 2 things start to grind against each other and start to look for sensible intelligent solutions that we can really deliver on today and so I would say I have seen.
Yes.
Recognition start to go on as people start to actually think about what the cost of some of these solutions means both in terms of direct cost to a consumer is and in terms of reliability.
And so.
The issues are starting to sober up a little bit as people really start to describe.
Described solutions. So I think we're I think natural gas is even better positioned right now.
Then I kind of thought it would be because I am noticing that.
That people are starting to pay attention to the impact on consumers.
Understood helpful. Second question, just a follow up on the sequent.
I know you've talked about EBITDA generation in sort of the $20 million to $30 million range annually, but I don't imagine that contemplates the uplift.
Sequined could provide to the entire asset network as a whole so curious on.
Am I right in that assumption and is there any way you can sort of help us quantify.
Natural benefit overall sequence starts to ramp up and integrate into the system.
Yes. Unfortunately, I don't think we're going to be able to provide unique spin.
Ossific numbers on that but you are correct.
And that is really the purpose of that acquisition was to drive.
Further volume benefit and I would tell you so far.
We are even.
The more excited than than when we were looking at the acquisition originally in terms of synergies between what our Williams existing customers want and we can provide services for and what sequence and that team has to offer so tremendous synergies really excited to see the team.
Starting to work together and they are identifying a lot of opportunities here.
Very rapidly so.
The honeymoon continues I guess I would say we continue to be very excited about.
What we're seeing from the sequent team and their ability to drive value across our asset base.
Great. That's all I had thanks for the time team.
Yeah.
Youre on your last question comes from the line of Michael Lapidus with Goldman Sachs.
Cash 2 parter here, 1 can you remind us what's the capital investment required for the deepwater projects for for.
So the 2 that you are kind of disclosing what should come on line by 2024.
First question second question is what's next step in terms of approval process for regional energy access.
Yes, I'll take the first part of that on the capital we haven't disclosed specifics on that capital, but I would just tell you. It's just south of $5 billion.
And so we haven't we haven't laid out on anything in terms of detail on that.
But we're really really excited about the way that projects come together and the capital team on the projects team has continued to find ways to take cost out of that project as well and that and by the way that includes a <unk> <unk>.
Expansion for our gas system and a connection of that.
The significant expansion for the oil side system of that.
And which.
Benefit for the future and as well on expansion of our Mark on the facility to be able to handle all of this rich gas so lots of lines of profits between the gas transportation the oil transportation and the processing of that gas and so we're really excited about the returns.
That area is paying off and I would also add there are several other large prospects out there that are looking.
Very fruitful as well.
So the story could get even better out there in terms of growth over time. So that has turned into a great project and our deepwater construction team has really done a nice job, we're well into that project at this point as you know we had a reimbursable agreement with shell So we're well into the.
Sales of engineering and in fact have already bought and have had all delivered all of the deepwater pipe for that project is now.
What was built in the UK, but it's now here in the U S. So.
Great efforts by the team and Mike do you want to take the regional index.
Just as a reminder, on regional energy access we made that FERC filing back in March for the project initially expected an environmental assessment to be completed for the project, but with the changing atmosphere at FERC. They are basically pushing all of the new projects that come in the door and even some that were already there prior to chairman.
Lift becoming chairman.
Go to an environmental impact statement, which takes a little bit longer for us. It shouldnt have an appreciable impact on the overall project schedule.
We'll expect to have FERC certificates next year in 2022.
It could begin construction later that year, we're still planned for Q4.2023 in service date for the project as we stand today.
Got it thanks guys much appreciate it.
Michael I would just add on the <unk>.
Deepwater on the.
Well project.
That height and Inc. A lot of the engineering, that's gone into that in a lot of the specialty fabrication is already in this year's capital budget. So a lot of the materials and pipe has already been paid for.
Or is or is included in this year's budgets that Don don't pilot on to the next couple of years ago.
Got it thank you.
At this time there are no additional questions I will turn the call back over to Alan Armstrong from Williams.
Okay well. Thank you all very much continued great success here in 'twenty, 1 teams continue to hit on all cylinders and <unk>.
Importantly, even though we've got great growth year in 'twenty, 1 won't really excited about is how we're positioned now for the future with a number of very important drivers for growth here in the future that will show up in 'twenty, 2 and beyond so.
Really set in a nice platform for growth for our business for years to come. So we thank you for your attention today and the great questions and we'll speak to you again soon.
Ladies and gentlemen, this does conclude today's conference call you may now disconnect.