Williams Companies Inc. Q2 2009 Earnings Call Transcript

Aug. 6.09 | About: Williams Companies (WMB)

Williams Companies Inc. (NYSE:WMB)

Q2 2009 Earnings Call

August 6, 2009; 9:30 am ET

Executives

Steve Malcolm - Chairman, President and Chief Executive Officer

Don Chappel - Senior Vice President, Chief Financial Officer

Alan Armstrong - President, Midstream Gathering & Processing

Ralph Hill - President, Exploration and Production

Travis Campbell - Head of Investor Relations

Analysts

Xin Liu - JPMorgan

Carl Kirst - BMO Capital

Faisel Khan with Citigroup

Rebecca Followill - Tudor Pickering & Co

Mark Huberfeld - TomCo

Operator

Good day everyone and welcome to the Williams Companies second quarter 2009 earnings conference call. Today’s call is being recorded. At this time for opening remarks and introductions, I would like to turn the conference over to Mr. Travis Campbell, Head of Investor Relations. Please go ahead sir.

Travis Campbell

Thank you Karen, good morning everybody and welcome to our second quarter call. As always, we thank you for your interest in our company. We just have a few slides to go over in the presentation this morning. Steve Malcolm will be going through those in just a minute. Be aware though, that all of our business unit heads are here and available for questions.

Also as with the previous quarters, we have put together a data book that includes data that we always provide each quarter. This quarter you will probably notice that some of the slides we used in our analyst day in May are also included in that data book.

So available this morning on our website, www.williams.com are four things, first the slides for this call, second the data book, third the press release and the company’s schedules detailing our results for the quarter and fourth the second quarter 10-Q which was filed this morning.

Also this morning we issued a press release announcing the completion of the binding open season on Transco northeast supplied project. At the beginning of the slide deck this morning are the forward-looking statements, and the disclaimer on oil and gas reserves. Those are important, and integral to the remarks, so please review those. Also included are various non-GAAP numbers that have been reconciled back to general accepted accounting principles, those sketches are available and follow the presentations.

With that, I will turn it over to Steve Malcolm, the CEO.

Steve Malcolm

Thank you, Travis. Welcome to our second quarter earnings call and as always we appreciate your interest in our company. This morning we are offering another stream line to earnings call that seem to go over well last time and I know there are quite a few energy company call this morning. I will be the only presenter, but our entire senior management team is present to answer any of your questions.

Starting with slide four please. Lower energy commodity prices certainly impacted our second quarter profitability, the $0.20 adjusted earnings per share is 70% below the year ago level. The average net realized price for US production drop to $3.95 in Mcf, that’s 51% lower than second quarter of 2008.

Per unit NGO margins improved versus the first quarter, up 75% from the first quarter, but still 31% from a year ago. The good news, we continue to record stable steady earnings and cash flows from gas pipeline, and we are very optimistic about the future and we are convinced that the market recovery will drive value accretion across all of our assets.

Looking more closely at the numbers on slide five; for the second quarter and the first of the year, the big story in our recurring adjusted results continues to be the significant disparity between the record high energy commodity prices we saw in 2008 and relatively low prices we’ve seen this year.

For the quarter we have recurring adjusted income of $0.20 a share compared with $0.67 in the second quarter of 2008 and for the first six months we had $0.42 of share compared with $1.23 in the first half of 2008.

In our reported results, the story is again low energy prices and significant nonrecurring items. For the quarter we reported net income of $142 million, compared with $437 million last year and again the key difference in the year-over-year performance for the quarter was dramatically lower energy commodity prices.

For the first half of 2009 we reported a loss of $30 million compared with a profit of $937 million year ago. The primary drivers include again, dramatically lower commodity prices, losses associated with our Venezuelan operations and investments, and thirdly I recall that our results in the first of 2008 benefited from a $148 million pretax gain on the sale of our international assets.

Slide six please. We reported recurring segment profit second quarter ‘08 versus second quarter ’09, just a few highlights under E&P and recurring. The key factors in the second quarter ‘09 much lower net realized prices for U.S. E&P production, again 51% below second quarter ‘08, as well as second quarter ‘09 we had higher DD&A expense based on higher level of production volumes. The average daily US production in the second quarter ‘09 was 6% greater than second quarter ‘08, 4% lower than first quarter ‘09.

Under Midstream, reported a recurring the decline in results primarily because of lower NGL and all are from prices, and lower NGL equity sales volumes partially offset by a decreased production costs reflecting lower natural gas prices and significantly lower NGL margins.

In the gas pipeline space again stable, steady predictable reported results reflect second quarter ‘08 included a benefit of $9 million gain on the sale of excess natural gas inventory. Recurring results down due to higher operating costs primarily from higher depreciation O&M and pension expenses partially offset by increased revenues from the Sentinel expansion which was placed in service in December of 2008.

Gas marketing, we see improvement because in the second quarter ‘09 includes $7 million improvement in margins from buying and selling gas around transportation contracts as well as margins realized on physical, natural gas purchases. Also second quarter ‘08 included an $8 million inventory valuation adjustment related to natural gas owned in storage.

Slide seven; reported and recurring segment profit of 2008 year-to-date, versus 2009 year-to-date. I’ve already covered much of this already, but again a few highlights that I haven’t covered in E&P reported results reflect year-to-date ‘09 includes approximately $34 million in expenses associated with early termination of rig contracts as well another point in Midstream, the reported results include a $75 million loss related to the impairment of Midstream’s equity investments in the actual assets in Venezuelan.

Slide eight; this chart updates our outlook for full year 2009 commodity price assumptions, as well as for earnings and capital expenditures. First column shows actual year-to-date results, second column our expectation for ranges in the second half of the year, third column provide revised full-year guidance.

You’ll note that the top end of our capital spending range for the year is down. I’ll cover a few reasons for that here in a minute. I think the salient point though is that we’ve narrow the range for recurring earnings per share from the earlier range of $0.55 to $0.95 narrow that to $0.70 to $0.90, or another way of looking at it we’ve raised the midpoint of full-year earnings per share guidance by a nickel.

Slide nine please; the slide recaps our 2009 priorities in the progress we are making, we’ve talked about these priorities with investors since the first part of the year. Again few highlights around the second bullet driving down costs, we are seeing savings on capital projects. A few examples, in the midstream area $25 million reduction in the total estimated cost on our Wamsutter TXP IV project, net savings flow through to our guidance.

In the EMP space we are seeing significant drilling cost decreases averaging close to 20% lower year-over-year in the Piceance Basin which comprises about two thirds of our total drilling this year.

Under the third bullet, having to do with bringing key infrastructure projects online, you’ll see that we are making progress, we’ve got a checkmark next to Blind Faith which is now online and there is a checkmark next to Willow Creek, our processing plant in the Piceance basin where as we speak we’re in the process of bringing net plant into service.

Under the last bullet, seizing opportunities of course we added an EMP component to our foot hold in the Marcellus Shale. So we remain on target to achieve the goals and priorities that we will focus in 2009.

Finally on slide10, we believe that we are well positioned to whether the economic storm because of our strong financial position because of stable foundation of cash flows because of our ability to adjust spending and our believe that the integrated model today is best suited for success.

In terms of substantial upside to our current valuation I would want to make a couple points we continue to see tightening at the Rockies basis remember that Williams is perhaps uniquely positioned to capture value in the NGL markets. Our Gas pipeline business continues to have great success with Base hit expansion projects that are driven by demand from the markets we serve. I always want to make the point around our core position the Piceance. It continues to create advantage.

We talked about that at our Investor Day in New York City. We enjoy the benefits of low costs of scale, the ability to be opportunistic. I think we’ve demonstrated conclusively how and why the Piceance Basin and the Rockies in general are good place to be, perhaps not for everyone, but absolutely for Williams.

Certainly the fact that Ruby pipeline, it appears is now more likely to be built with El Paso now having a partner. That’s clearly a good thing for Williams. All of the above I think translates into an attractive risk reward balance for Williams and again we are very excited about the future.

With that we’ll be happy to take your questions.

Question-And-Answer Session

Operator

(Operator Instructions) Your first question comes from Xin Liu – JPMorgan.

Xin Liu – JPMorgan

Good morning guys. Questions on your Midstream NGL margins for your guidance, it seems like year-to-date your average realized margin is $0.27 and it seems like you took down the lower end of the NGL margin. Can you give us your outlook on the NGL market?

Alan Armstrong

First of all of course we saw a large improvement from first quarter to second quarter. We saw very nice increase in margins, mostly on the backs of ethylene margins which has improved dramatically. Recalling the first quarter we were in rejection in many locations. Here in the second quarter and into the current period we were into very improved margins on ethane.

That is largely driven by the large spread between crude oil and gas prices, and ethane right now is the only component that is in the money for ethylene crackers right now for in a cash margin basis. So we are seeing a lot of pull on ethane right now which is driving those ethane margins up and giving us some confidence about where they stand for the balance of the year at this point.

Xin Liu – JPMorgan

Another question for Ruby, how much do you have spent so far and factoring the equity contribution from your partner, how much you need to put out for financing the project during construction and what capital structure are to take after the completion?

Alan Armstrong

I am sorry let me clarify, we are not a financial partner in the Ruby project. My comment about Ruby earlier was simply the fact that El Paso now has a financial partner. There seems to be greater likelihood that the pipeline will be build creating more take away capacity out of the Rockies which is a good thing for Williams, since we have a lot of our production in the Rockies.

Xin Liu – JPMorgan

I’m sorry. I messed up with you said El Paso. Can you comment on your outlook on the Rockies basis?

Ralph Hill

This is Ralph Hill, the basis is done what we have thought would happens since May, we think with the severe decline in drilling in the Rockies and also the extra transportation capacity that has been built already, and we will be build with Bison, the Bison project and with the Ruby project.

What we see is the basis has gone down to about $0.85 from where it was over $1 at that time. The next three years or so all in that $0.80 to $0.85 rate, so what we thought would happen is happening, there is excess capacity coming out, the basis is shirking and our ability to move our gas or the Rockies is coming true just like we thought it would be.

Xin Liu – JPMorgan

Did you expect the basis to widen, if gas prices go up?

Ralph Hill

Well we don’t think it was, not likely to have sometime historically. We think that the Rockies is a preferred place to be for transportation opportunities because the infrastructure is mature and since its build out already, it’s been added to extra capacity.

There has been a dramatic drop in the production levels that will be happening in the Rockies due to the number of rigs laid down. So, I do not see that growing out and if you look at the futures market out there it is pretty consistent around $0.80 to $0.85 in the next several years. So it doesn’t look like the market thing is going to go blow out either.

Operator

Our next question comes from Carl Kirst - BMO Capital

Carl Kirst - BMO Capital

Couple of questions, Ralph just to clarify, we’ve kind of long been expecting obviously the sequential decline in production. Are you guys deferring any completions or otherwise have shut in. Are your managing production at all or should we take the number basically purely at the service?

Ralph Hill

We have deferred some completions and by the end of the year, we’ll be deferring probably in the Piceance 75 or 80 completions. We also are not doing anything heroic to bring volumes on in various series that we traditionally would have done. So we are managing production a little in that aspect, yes.

Carl Kirst - BMO Capital

Okay, that’s helpful. Then just following up on the E&P side in the Marcellus and I guess the question is, with sort of the dipping or the turn of the water with the Rex deal in June, do you see more opportunities to do that? Do you feel like you have to wait perhaps to get some Rex Wells down before you’d want to reassess perhaps other bootstrapping opportunities or indeed or even potentially assessing larger moves into the Marcellus?

Ralph Hill

Well we can’t predict the future obviously, but we’ve studied the base and for a couple of years. Our technical team was very, very confident in the areas we’d like to be in and we have seen, even before the Rex deal and at the time of the utmost deal with our Midstream group.

We’ve seen a lot of deal flow. I think that’s pretty obvious, it’s going out here for a lot people. So we think there is a quite a bit opportunity out there, I can’t predict where it will end up, but those areas we like a lot and we continue to see a lot of deal for, a lot of opportunities as always there is something we could put together that makes sense for Williams and for our partners.

Carl Kirst - BMO Capital

With respect to the bootstrapping versus potentially larger acquisitions, I mean is that something you can answer us with respect to bias, I mean obviously you will opportunistic if something great come along, but do you have bias towards one approach to the other?

Alan Armstrong

Carl, well just continue to be opportunistic and continue to evaluate the opportunities out there. As Ralph mentioned a lot of deal flow, lot of opportunities for us to look at things, but I think key point to remember is that we’re going to be disciplined and we’re going to live within our means.

Carl Kirst - BMO Capital

Fair enough and then last question if I could maybe for Alan, just turning to the Gulf of Mexico, one of the other natural gas gatherers in the deep water is perhaps hit upon more of a traditional cost of service model. Is that something that you guys think would be replicable as well?

Alan Armstrong

Well for pieces of the business I think that is the case and it kind of depends on how much of the excess capacity you are willing to grant to the counter party. So in other way in a lot of those deals, the counterparties controlling any excess capacity or have the call on it and takes away quite a bit of the upside.

So we have seen some deals like that out there, but it certainly takes with it a lot of the upside that we’ve seen for instance on Devils Tower business where we have the excess capacity, we are able to price that at market.

So those deals are available, but as you know there is a lot of risk out there and we think we need a pretty high return to balance any risk on the construction support that we take out there. Yes, I think some of those are available and we probably have better places for that kind of lower return. We probably have better places to put on money than that.

Operator

(Operator Instructions) Your next question comes from Faisel Khan with Citigroup.

Faisel Khan - Citigroup

On the E&P segment, looks like you guys were free cash flow positive in the quarter. I just want to understand the trends kind of going forward, I guess should we expert production in kind of trend down at the same rate we saw the sequential decline in first quarter of this year to the second quarter of this year and how should we expect that CapEx and E&P for the rest of this year? Thanks.

Ralph Hill

We’ve got guidance out there between 950 and 1.5 billion so we’ll stay in that range for our CapEx for the balance of the year. The way we’ve looked out is fourth quarter ‘08 or fourth quarter ‘09 we think will be down approximately 4% to 5% in production, which means that would be some decline that would give us an overall decline for the year of 45%, we are staying with that.

I would say that so far we have surprise to the upside of that, so may not be quite that much decline and we’ve also mentioned that in 2010 although we haven’t given our guidance here we have said that we don’t think that the decline continues. We think we pretty much stay flat based on this kind of level of capital expenditures if we keep the same level of capital expenditures in 2010.

Faisel Khan - Citigroup

Just looking at the production tax number, any reason why the production tax rate was so low.

Ralph Hill

Well, yes there is two reasons, one obviously lower gas prices is a big part of that, but it was offset by the lower effective tax rates and the way that was lower effective tax rate was because we had some ad valorem tax credits that were provided to us in particular by the State of Texas that we recognized in that quarter.

Faisel Khan - Citigroup

Just shifting to the Midstream side equations for a second, the decision in the beginning of the year to shift, I guess some of your key contracts are fee based, was that a decision by your customers or was that decision by you, or was that more of a negotiation?

Alan Armstrong

No that was built into an original contract that the customer had the option on and was a large package of Jonah gas that dated back to the original construction of Opel of the third train at Opel. So they had the option of changing the fee based and elected to do so.

Faisel Khan - Citigroup

Alan, can you comment a little bit about any tightness in the fractionation capacity in the market today? It seems like we’ve been hearing on some of the Midstream calls at fractionation capacity seems to be a bit tight?

Alan Armstrong

Yes, it certainly has tightened up considerably and we’re very fortunate to have for a lot of our business range to do with One Oak where the Overland Pass transaction for most of our product and have got the capacity we need, but certainly that is tightened, we’re certainly seeing that with our Conway fractionators. We are seeing a lot of demand for that space in running full out.

So I think there is no secret that in the Mont Belvieu and Mid Continent area, the Fractionates capacities are very tight right now.

Faisel Khan - Citigroup

On the pipelines sequentially, it looks like operating cost went up pretty substantially, I know you talked about pension costs in your prepared remarks, but is that all with the increases or is there something else there?

PhillipWright

This is Phil Wright. We had the pension increase which is substantial chunk of that. We also had a depreciation increase as well and then we did have some year-over-year, quarter-over-quarter rather operating expense increases, but the detail on that I think is in your book.

Faisel Khan - Citigroup

Last question on your cash balance of about, I think you said $1.8 billion. How should we expect that balance to kind of trend over the course of the year, I think that’s a bit higher than we had expected going to the second quarter?

Don Chappel

Faisel, this is Don Chappel. If you look at one of the slides in our data book, we have cash flow analysis forecast for the balance of the year. I think it’s on page number 43 of the data book. We continue to expect that the US portion of that balance excluding the MLP’s will be in a range of $700 million to $900 million by the end of the year.

Operator

Your next question comes from Rebecca Followill - Tudor Pickering & Co.

Rebecca Followill - Tudor Pickering & Co

Couple of questions on the E&P side, again I’m still going to numbers I apologize there’s lots of earnings out this morning, so if I missed something I’m sorry. It took like production guidance is up by just a hair. It was 1125 to 1225 and now its 1175 to 1225 is that correct?

Alan Armstrong

That is true. Yes.

Rebecca Followill - Tudor Pickering & Co

Did it include previously the deferral at Piceance completions?

Ralph Hill

Yes. We have not changed that, we’ve always had about 65 or 70 wells are going to be deferred, yes.

Rebecca Followill - Tudor Pickering & Co

Okay and the reason for the increases?

Ralph Hill

Well we’ve actually done better year-to-date and we thought we would based on our original plan and because of that, the flow that we thing will keep going during the year is that we’re just doing little better and we thought.

Rebecca Followill - Tudor Pickering & Co

Then when I am looking at the volumes by segment, it looks like the biggest decline sequentially is in part of our basin. Is that the area where we should expect to see the biggest decline just to the rest of this year?

Ralph Hill

Potentially what we are seeing is it’s obviously it’s just a function of and there is a number of wells that are dewatering both Horizon are primarily our partners. So, that is again it depends on when they crosses over to the gas flow side, but that is where we potentially can have a decline.

Rebecca Followill - Tudor Pickering & Co

Great and then last thing on the Midstream on the JV and Marcellus any updates there, any changes on where you guys want to spend CapEx or any other thoughts, now that you had it for a while?

Alan Armstrong

Well, I guess I would just categorize back that we’ve seen a lot of investment opportunity both on relatively small assets in the area that need to be aggregated and to be able to access better markets. So we’ve seen a lot of some relatively small assets the producers were interested in selling and we’ve also seen tremendous amount of new investment opportunity for some of the major step out opportunities amongst producers there that are looking for infrastructure.

So, the opportunities probably bigger, its certainly a lot more opportunity than we thought going in and there is just a lot of unknown just you can imagine right now making waiting on various issues around a water disposal and so forth that are leaving people from making big commitments, but they are kind of still hanging in the wings there, but certainly much more opportunity than we expected going in there in terms of both acquisition and grass-roots investment opportunities.

Rebecca Followill - Tudor Pickering & Co

When do you think that you will have a feel that you will be able to get to us on what kind of capital will you ultimately put in to that business, with that area?

Alan Armstrong

I think that is going to be evolving for a long period of time. I think that will better be changing for quite sometime.

Operator

Your next question comes from Lasan Johong - RBC Capital Markets.

Lasan Johong - RBC Capital Markets

There is a lot of discussion around about high storage levels causing pipeline pressures to build, which obviously could lead to full shutting down gas well. So I know you had mentioned that the Rockies capacity, take away capacity is increasing so that probably not going to happen to your Rockies basin, but I just want to double check if you are seeing any of that phenomenon happening in any of your other regions, number one.

Number two; what consequences that has for your Midstream businesses, obviously if E&P shuts in, gathering and processing revenues and if that is the case, if there are minimum threshold that E&P companies have to pay you to maintain or keep those contracts open. I know that’s a lot, but as you could start with that it would be great.

Ralph Hill

This is Ralph. Let me take the first part. I do think what we’ve seen in the Rockies in the last two months, we monitor is that the storage is not filling up as fast as it was and that is primarily because of the Rex East capacity coming on.

So obviously we think storage will get full in the Rockies at some point, but we don’t see where it’s going to be full at such a fast rate as it was going earlier in the year. So we haven’t seen it in any of our areas pressuring of for any of that at this point and we don’t think the Rockies really will do that particularly with our transport capacity out there, and I’ll let Alan take the second part of that question.

Alan Armstrong

Yes, I think on the Midstream side particularly out west, we certainly haven’t seen any of that yet. We deliver into pipes and they have a norm based on certain design pressure. We are capable delivering into that design pressure on all of our locations.

Generally, most of our larger customers and the bulk of our revenues do come from large customers have downstream capacity on the pipelines to server their production needs and so we’re not seeing reduction and production right now and are not forecasting any on our systems due to storage constraint. So not saying that won’t happen, but we’re certainly we are not seeing any rim at so that are any signs of that right now.

Lasan Johong - RBC Capital Markets

Next question is the $0.70, $0.90 guidance range outside of price moment what could help Williams achieve the upper end or above, and what would cause Williams to miss the lower end or below?

Don Chappel

This is Don Chappel. I would say that the primary driver of that range is pricing, price and margins. Certainly costs are a factor, but a fairly modest portion of the variable there.

So I think we’re confident about our production, I think we are confident about our cost management so I’ve to say the primary driver other than just surprises would be pricing and margins.

Lasan Johong - RBC Capital Markets

Okay. So it’s really all in your control?

Don Chappel

Pricing and margins are not within our control?

Lasan Johong - RBC Capital Markets

Outside of pricing.

Alan Armstrong

Yes.

Operator

Your next question comes from Mark Huberfeld – TomCo

Mark Huberfeld – TomCo

Just a quick question from the analyst day earlier in the year, you had said indicated may be that would be some insight into cost cuts or OpEx reductions may be around this time of the year. Could you maybe just update us on that?

Alan Armstrong

Looking for the AMP side we have achieved what we thought we could do in lot of our areas. Capital side of world down we’re down about 26% so far may be lower in our capital costs, like well basis this year versus last year.

I think if you look at our lease operating expense in the second quarter ‘09 is like 13% below what we saw in 2008 and we could see all of that continue to turn down quite a bit. So we are feeling very positive about what we thought could happen and what we’ve seen actually happens so far.

Mark Huberfeld – TomCo

I was thinking maybe more or so on G&A and corporate and other areas of the business where that you’ve grown OpEx in the last several years in the better environment?

Alan Armstrong

We continue to look for opportunities to cut costs, we have not yet made any wholesale cuts in our work force because coming into this downturn we were short and so we continue to look for ways to cut cost and taken some steps. I think those are reflected in our guidance and we’ll continue to operator our business in a very disciplined manner.

Operator

With no further questions, I’ll now turn the conference back over to Mr. Campbell for any additional or closing remarks.

Steve Malcolm

This is Steve. I appreciate your time. I know there are a lot of calls today. A solid quarter and we are very excited about the future. So thank you for calling-in today.

Operator

Once again that does conclude our conference for today. Thank you again for your participation and have a wonderful day.

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