Williams Companies (WMB) announced fourth quarter and full year 2011 reports, after adjusting the results of the separated Exploration & Production (E&P) business as discontinued operations.

In December 2011, Williams completed the spin-off of its E&P segment into a separate, independent and publicly traded company, named, WPX Energy Inc. (WPX).

For the fourth quarter, Williams’ earnings per share, excluding special items, came in at 36 cents, below the Zacks Consensus Estimate of 41 cents. Comparing year over year, earnings improved 20.0% from 30 cents, backed by strong performances from expansion projects along with improved margins.

For the full year, earnings per share were $1.23, up 35.2% from $0.91 in the prior year. The reported result, however, failed to meet our projection of $1.57 per share.

The company generated revenues of $2,103 million, failing to meet our expectation of $2,807 million. However, sales climbed 20.8% from prior-year level of $1,741 million.

Williams generated revenues of $7,930 million in fiscal 2011, compared with $6,638 million in 2010.

Total adjusted segment profit was $578 million in the quarter (up 20.4% year over year) and $2,197 million in 2011 (up 26.8% from 2010).

Segment Analysis

From fourth quarter 2011, Williams is reporting its results in three segments (following the spin-off of Exploration & Production unit): Williams Partners, that includes the company’s 73% owned master limited partnership Williams Partners L.P. (WPZ); Midstream Canada & Olefins; and Other.

Williams Partners: This segment reported adjusted operating profit of $519 million in the quarter, up from the year-ago level of $426 million, based on strong contributions from gas pipeline business coupled with higher fee-based revenues and higher NGL margins in the midstream business.

Midstream Canada & Olefins: The segment registered quarterly adjusted operating profit of $58 million, up from $49 million in the fourth quarter of 2010. This year-over-year improvement can be attributed to higher margins from Canadian butylene/butane mix product as well as improved per-unit margins on Geismar ethylene.

Other: The segment’s adjusted operating profit was $1 million, as against $5 million in the prior-year quarter.

Capital Expenditure & Balance Sheet

During 2011, Williams incurred a capital expenditure of almost $2,796 million, of which 35.4% was invested in Williams Partners.

As of December 31, 2011, the partnership had cash and cash equivalents of about $889 million and debt of $8,722 million, representing a debt-to-capitalization ratio of 82.9%.

Guidance

Williams guided earnings per share in the range of $1.15-$1.60 (form $1.15-$1.60) for 2012 and $1.30-$1.80 (against the previous forecast of $1.20-$1.70) for 2013.

Williams expects to generate total adjusted operating profit of $1,975 million to $2,575 million in 2012 and $2,175 million to $2,825 million in 2013, while capital expenditure is projected between $3,400 million and $3,800 million for 2012 and $2,100 million and $2,700 million for 2013.

Dividend

Williams plans to make a dividend payout of $1.09 per share for 2012, up 41% from 2011 levels. For 2013, dividend is expected to improve at 10% to 15%.

Our Recommendation

We remain positive on the outlook for new Williams post-split, as it holds the promise of unlocking significant value. Additionally, with Williams now free from the capital constraints of a typical E&P firm, is set to take benefits from its exposure to bullish natural gas liquids processing market and a deep inventory of growth projects.

Hence, we believe that Williams is favorably positioned to continue accelerating revenue and earnings growth over the next few quarters and maintain our long-term Outperform rating on the stock.

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