Williams Companies Stock To Gain With Rising Natural Gas Demand

by Trefis Team
+12.87%
Upside
7.23
Market
8.16
Trefis
PBR
Petroleo Brasileiro Petrobras
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Despite a 125% rise since the March 23 lows of this year, at the current price of around $20 per share we believe Williams Companies’ stock (NYSE: WMB) has more to go. WMB stock has rallied from $9 to $21 off the recent bottom compared to the S&P which moved 48%. Williams Companies is an energy infrastructure company that provides gas pipeline services and gathering and processing services to upstream oil & gas companies. The company handles nearly 30% of the country’s natural gas volumes. The stock has outperformed broader markets due to stable natural gas transportation volumes despite a 10% drop in revenues for the six months ending in June.

WMB stock has nearly reached the level it was at before the drop in February due to the coronavirus outbreak becoming a pandemic. Despite the healthy rise since the March 23 lows, we feel that the company’s stock still has potential as the oil & gas production volumes rise during the latter half of the year.

In the past two years, the company has observed continuous improvement in net margins despite low top-line growth. Thus, the adjusted net income has nearly doubled, resulting in a 57% growth in adjusted EPS.

While the company has seen steady earnings growth over recent years, its PE multiple has largely remained stable. Considering the historical trends in the PE multiple, we believe the stock is likely to see a single-digit growth as oil & gas demand improves during the latter half of the year. Our dashboard What Factors Drove -20% Change in WMB Stock between 2017 and now? has the underlying numbers.

WMB’s PE multiple changed from 25 in 2018 to 23 in 2019. While the company’s PE is now 21, there is a slight upside when compared to levels seen in the past years.

So what’s the likely trigger and timing for further upside?

Weakness in crude oil & natural gas prices is the key concern for the oil & gas industry. However, the commercial crude oil inventories are observing a declining trend, indicating rising industrial and transportation demand. Growth in benchmark prices will provide further upside to William Companies stock as midstream operators benefit from the resumption in upstream production.

The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations become important in finding value. Though market sentiment can be fickle, and evidence of an uptick in new cases could spook investors once again.

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