Natural gas producer and pipeline firm Williams Companies (WMB) reported weaker-than-expected third quarter 2010 results, reflecting a disappointing Exploration and Production (“E&P”) business segment activity. Earnings per share, excluding special items, came in at 22 cents, below the year-ago quarter earnings of 25 cents and the Zacks Consensus Estimate of 29 cents.
The partnership generated revenues of $2.3 billion, failing to meet our expectation of $2.8 billion. However, compared with the prior-year quarter, revenues increased 9.5% from $2.1 billion.
E&P
In the E&P business, total production was down approximately 1.0% year over year to 1,190 million cubic feet equivalent per day (MMcfe/d). Domestic volumes decreased 1.0% year over year to 1,135 MMcfe/d, reflecting the partnership’s decision to curtail drilling during the recent recessionary period of low prices.
In the third quarter, average daily net production from the Piceance and other basins was down approximately 2% and 5%, respectively, from the year-ago level. However, Powder River basin witnessed a 6% growth in production from the prior- year quarter.
Williams’ domestic average realized natural gas price upped to $4.35 per thousand cubic feet equivalent (Mcfe) from $4.18 Mcfe in the third quarter 2009, somewhat counterbalancing the lower production volumes.
Segment operating profit (excluding non-cash impairment charges) was down 32.3% year over year to $65 million in the third quarter. Higher exploration expenses involving the partnership’s activities in the Paradox basin along with increased operating taxes impacted the segment operating income.
Williams Partners
This segment reported an operating profit of $343 million, down from the year-ago level of $347 million, primarily based on reduced natural gas liquid (“NGL”) equity sales volumes due to less gas deliveries in the Gulf region. Lower fee-based revenues in the partnership’s midstream business also affected the quarter results. However, these negatives were partially offset by higher per-unit NGL margins in the midstream business along with better gas pipeline business results.
Other
Segment operating profit was $80 million, against $31 million in the year-ago quarter. This year-over-year improvement can be attributed to higher production margins from NGL and olefins and the profit from the sale of the partnership’s Accroven interest.
Capital Expenditure & Balance Sheet
During the quarter, Williams spent $1.2 billion on capital expenditure, up from $752 million last year. As of September 30, 2010, the partnership had debt of $8.5 billion, representing a debt-to-capitalization ratio of 54.8%. Williams has a current cash balance of about $1.0 billion.
Divesture of Piceance Gathering & Processing Assets
In a separate development, Williams agreed to sell its gathering and processing assets in Colorado’s Piceance Basin to Williams Patners for $782 million. Williams will receive $702 million in cash and $80 million in William Partners L.P. (WPZ) limited-partner and general-partner units.
Guidance
Management guided toward full-year 2010 earnings of $1.00 to $1.20 per share, while 2011 is likely to be between 90 cents to $1.60 per share. Capital expenditure during 2010 is expected to be around $3.4 to $3.8 billion. Williams expects to spend between $2.4 billion and $3.6 billion in 2011.
Our Recommendation
We appreciate Williams’ portfolio of healthy upstream asset base, offering ample growth opportunities in the coming months. The partnership’s midstream business segment is going strong and we believe that Williams is poised to benefit from the rebound in industrial activity that will see an increased natural gas demand in the form of natural gas liquids.
However, the price fluctuations of the natural gas and natural gas liquids pose substantial risk to the profitability of the partnership. Overall, we see limited upside from current levels and rate Williams as Neutral in the long run.
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