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Executives

Travis Campbell - Head of Investor Relations

Steve Malcolm - Chairman, President and Chief Executive Officer

Don Chappel - Senior Vice President, Chief Financial Officer

Ralph Hill - President, Exploration and Production

Analysts

Jonathan Lefebvre - Wells Fargo

Jessica Chipman - Tudor, Pickering, Holt

Faisel Khan - Citi

Holly Stewart - Howard Weil

Harry Mateer - Barclays

The Williams Companies, Inc. (WMB) Q3 2009 Earnings Call October 29, 2009 9:30 AM ET

Operator

Good day, everyone and welcome to the Williams Companies Third Quarter 2009 Earnings Conference Call. At this time for opening remarks and introductions, I would like to turn the call over to Mr. Travis Campbell, Head of Investor Relations. Please go ahead, sir.

Travis Campbell

We do have a few slides to go over in our 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 available for any questions. Also as usual, we've put together our data book that includes all the information that we provide each quarter. So, this morning, you should be able to find the slides, data book and press release that were issued earlier today on our website, Williams.com.

At the beginning of the slide deck of the forward-looking statements and the disclaimer on oil and gas reserves. Those are important and integral to our remarks, please review those. Also included are various non-GAAP numbers that have been reconciled back to Generally Accepted Accounting Principles. Those schedules are available and follow the presentation.

So with that, I'll turn it over to Steve Malcolm.

Steve Malcolm

As has been the case with our last few earnings calls, I'll be the only presenter today, but the entire team is here to answer any of your questions. We've got a lot of good feedback on this approach and we'll continue it today. So slide four, please. We enjoyed a strong third quarter. We like the earnings growth trajectory that we're showing on this slide.

In the third quarter, we grew recurring earnings per share 25% over our second quarter, and we're on track to deliver earnings for the second half of '09 that are 33% higher than the first half of the year. We're raising our guidance today for full-year 2009 to a range of $0.95 to $1.00. We're calling the midpoint of that $0.98, and that's 18% higher than when we last updated guidance, which was when I spoke at Barclays and BofA conferences in September.

We've noted the key drivers of our strong third quarter and of our higher expectation for the full year in the upper left quadrant of slide four. Commodity prices have improved. Our net realized price for natural gas production was $4.18 in the third quarter; that's up 6% from the second quarter. We are continuing to benefit from lower operating cost and I'll cover that in more detail here in a minute.

NGL margins are making significant improvements. The progression of $0.20 in the first quarter, $0.35 in the second; $0.45 in the third. That's a nice upward trajectory. We've seen the Rockies basis differential cease to be an issue. Following production levels combined with expanding takeaway capacity have tamed the differential. In fact at times recently, we've seen markets be higher for Rockies gas than at the Henry Hub. These are the key drivers in our ability to build that strong upward trend for earnings growth.

Slide five, please. As you can see here, we expect earnings growth to continue in very strong fashion. Our earnings growth engine is certainly alive and we're rapidly regaining our ability to create significant value for shareholders. Yes, the improving energy/commodity prices play an important role in that earnings growth through 2011, but as you can see from these arrows, we expect our earnings growth to be significantly greater than the improvement in commodity prices during that period.

The green arrow shows 91% growth in our adjusted earnings per share from 2009 to 2011. The $1.87, at the midpoint of our guidance range for 2011 would move us close to the record high earnings that we produced in 2008. We're basing that expectation of sharply higher earnings on commodity price assumptions that showed crude prices improving less than 40%, and natural gas moving up just over 50%. We're not relying on $100 oil and $9 gas to get back to where we need to be.

Slide six, please. Here we take a look at the 2009 to 2011 growth and how it looks from a segment profit standpoint. Overall, we expect to increase total recurring adjusted segment profit by nearly 50% from '09 to '11. A quick overviews of the drivers in E&P. We expect to see better than 80% growth in our E&P segment profit, based largely on higher commodity prices and by 2011, increased production volumes.

In midstream, we're expecting about a 60% increase in our midstream segment profit. Key drivers are the higher NGL margins and the effect of new fee business projects like Willow Creek in the Piceance; like Blind Faith in the Gulf that have now come online. And we expect our gas pipeline business to continue to deliver strong, steady results as we meet market demand, primarily through expansion projects on our strategically located systems.

Slide seven. This slide shows maintenance capital and growth capital by business unit from 2009 through 2011. The key takeaway here is, we continue to be opportunity rich. We're investing in excess of $4 billion in growth projects during the period 2009 to 2011. So, we're adding fuel to our earnings engine, we're investing in the rich opportunities that are created by our unique business strategies and our best-of-class assets. We're making these investments with a continuing commitment to live within our means.

Slide eight, please. We always want to take advantage of any opportunity to talk about the Piceance Basin. And for shareholders of Williams, it's worthwhile to remember the value creating strength that our Piceance Basin strategy delivers. Looking at the left hand side there, this is a world class resource. The drilling economics are shale play strong. Let me offer a few more comments on that point. We're in the Marcellus, we're in the Barnett, to a lesser extent in the Woodford Shale.

We've evaluated numerous deals in all of the other shales, Fayetteville, Hainesville, Eagleford. However in our view, none of them has exceeded the quality of our core Piceance position. Most people agree with us now that the Rockies basis differential has been tamed by following production, coupled with expanding capacity on Rex, Bison and Ruby. This is clearly represented in the forward markets more favorably than when we presented our typical well comparisons at our May call.

So with the threat of basis removed, Piceance moves to the very top of the list of US gas plays. And we have thousands of low risk locations left to develop. So continuing down the left side. Our costs are low; we have a track record of high returns; we enjoyed the benefits of scale. This map shows the breadth and depth of our Piceance operations in each of our businesses. We continue to be opportunistic. Willow Creek, full operations announced in late September; the Colorado Hub Connection that will be in service very soon; and the Piceance lateral extension, which is an NGL line to Overland Pass, which should go into operation before the end of the year.

I'm going to pause here now in terms of my slideshow and do something new today. We talked with investors often and we thought that it might be good to run through some of the most often asked questions and give you a little flavor as to our point of view on some of these key issues.

We've had a lot of questions about updates on our JVs with Rex Energy and Atlas and Marcellus, so let me give you an update. In June, we announced that we had signed the participation and exploration agreement to develop natural gas wells in the Marcellus shale with Rex Energy.

I'm not going to go through the essence of the deal. I refer you to our press release on that deal. But since the initial announcement in June, we've established an office in a suburb of Pittsburgh. We've commenced assembling an asset team. We're preparing to assume drilling production and commercial operations on January the 1st.

We're on track to drill seven wells this year as planned, and more specific information on well performance and plans for 2010 will be announced as we complete more wells, and have the time to analyze the data from our initial production. As you'll recall that on June the 1st, we entered into a midstream joint venture with Atlas Pipeline Partners, refer you to the press release on the essence of that deal. But since we've formed the midstream joint venture in June, we've continued to make progress. We're nearing the end of the planning phase of the new Marcellus gathering system, which would be made up of over 60 miles of pipe designed to have in excess of 300 million a day of capacity. The system would be located near Uniontown, Pennsylvania, with an expectation that portions of the new system would be in service by the end of the second quarter of 2010.

The new midstream joint venture called Laurel Mountain Midstream is planning on connecting over 150 Marcellus wells to the new system and the legacy system in 2010. Atlas has drilled over 170 vertical wells with two staged fracs, averaging about 2 million a day. In addition, they've drilled 12 horizontal wells, seven of which that have been completed and for 2010, they're planning to drill 30 horizontal wells.

Another question that we get often, what is we seeing in terms of volume trends for our midstream business? The good news is currently, gathering volume; processing plant inlet natural gas volumes; NGL equity sales and total NGL production for the third quarter of 2009 are all higher than any quarter since at least 2007.

Looking ahead for 2010 and 2011, there are a variety of trends, while Wyoming drilling may be down in the short-term, we're based loaded with Pinedale and Jonah production at Opal. We're still bypassing gas there and any cuts in natural gas production will likely hurt our competition in the area, but before it impacts volumes at our Opal plant.

At Wamsutter, we expect volumes to increase due to BP drilling behind the plant. Down in the Four Corners area, we expect slight declines over the next few years, as that huge mature basin continues its normal basin decline. In the Gulf, we expect increases driven by Perdido Norte, Bass Lite, and Blind Faith as producers of oil and associated gas continue to grow production in the Gulf. These new connections will offset other declines from production we are servicing in the area.

Finally, new capacity at Markham, which serves the Gulf; TXP4 at Echo Springs in Wyoming; and our new Willow Creek plant in Colorado will all increase overall volumes for midstream. Taken as a whole, these translate us to believe that our gathering and NGL production for all of midstream will continue to increase slightly over the guidance period.

Another question is around the Rockies basis. What do we see? What do we feel? And I'll start here with a few data points. For 2008, the Rockies basis differential averaged (inaudible). In the first quarter of '09, that dropped to $1.51. In the second quarter, it dropped to $1.15. And for the third quarter, it averaged only $0.36.

In the last month or so, the basis differential has essentially evaporated. The sum daily price is even showing Opal prices greater than Henry Hub prices. Why are we seeing this? What are some of the reasons? Rockies production is down by about 0.5 Bcf since the beginning of the year. Storage levels in the Rockies are at historic norms, not highs, norms. Rockies rig count remains down over 60% from peak 2008 levels. Rex has added 400 million a day of capacity since the first of the year. Bison and Ruby will be adding almost 2 Bcf of capacity over the next two years.

So we believe and many others believe, that there will be no pipeline constraints out of the Rockies for quite some time. We think that we are clearly in an over piped situation. We've also received questions on cost improvements that we're seeing in our E&P business; drilling efficiencies; lower CapEx per well; reduced number of wells in drilling and completing a well.

There have been a number of efficiencies and cost reductions from vendors associated with the recent downturn of drilling activity. A few examples, in the Piceance Valley, from third quarter '08 to third quarter '09, we have reduced costs for workovers by 75%, through a combination of doing fewer workovers and accomplishing efficiencies, and realizing cost reductions on those that we do. Efficiencies and vendor cost reductions have reduced lifting costs by about 25% to 30% for chemicals, water handling, plungers and well equipment.

We've reduced a typical valley well drilling and completion cost by about 25%, from $1.9 million in the third quarter of '08 to about $1.4 million in the third quarter of '09, which includes improvements to these spud to spud time. On average, we've improved by one day, which represents in itself about a 7% to 12% improvement. These reductions were accomplished by a combination of negotiated vendor cost reductions, led by lower casing and fuel costs, lower negotiated fracing costs, and lower costs for completion rigs.

Let me now continue with the slides, and if we could go to slide 10. We've talked about these priorities throughout the year. And I believe that we have executed crisply around all of these priorities. And so you see checkmarks on all of these. We certainly have maintained our strong balance sheet throughout the year, and liquidity. We've been successful in driving down costs through execution and expense discipline.

We have brought, and are bringing, key infrastructure projects online in '09 and '10. You see with the checkmarks where we have brought new projects online, and you see Perdido Norte and Echo Springs expected to come on in '10; Sentinel and Colorado Hub, two gas pipeline projects expected to come online in the fourth quarter of '09. We definitely did right-size capital spending and continue to be disciplined. With the opportunities that we have seized in the Marcellus, we haven't just played defense.

My last slide, slide 11. We do believe that Williams is a winning, long-term investment. We're seeing improving fundamentals with respect to gas and NGLs. We have best-of-class assets, which favorably position us to generate strongly higher earnings. There's substantial upside to our current valuation. We are opportunity rich, which leads to sustained growth ahead, as reflected in our 2010 and 2011 guidance. And we offer a unique and attractive risk reward balance to investors.

So with that, we will take your questions.

Question-And-Answer Session

Operator

(Operator Instructions). We’ll take our first question from Jonathan Lefebvre, Wells Fargo.

Jonathan Lefebvre - Wells Fargo

Just a couple of quick questions on the Marcellus. It looks like you increased some of your acreage. I believe you had 22,000 and at your slide you said 25. Should we expect that the strategy will be kind of grassroots leasing? Also maybe can you comment on where you're seeing lease prices? We've been hearing that the prices have not dropped with commodity prices.

Ralph Hill

You'll see a combination. We clearly are doing grassroots leasing, but we're also looking at a number of other opportunities, such as the joint venture we're in right now. So it's kind of a combination going forward. In our lease prices, we have not seen necessary decrease in the price of Marcellus leasing. But I don't really want to get into what the cost of the leases are going for right now.

Jonathan Lefebvre - Wells Fargo

It looks like you increased the hedges in Appalachia. Is that 100% hedged at this point? What you expect your production to be and then also on terms of the most reason two wells that Rex has drilled, any indication on those two wells?

Ralph Hill

We initially hedged what we thought our production would be, so we've tried to pretty full hedging on the initial amount of volume, but as we add volumes, obviously, there will be a portion that will be unhedged. We'll let Rex comment on the wells, but what I would say is the first handful of wells we looked at, we thought of them as science wells. And one of the wells that we've just completed, is much better than any science well we thought would be.

So, we're doing a lot of work on the wells. We're doing a lot of testing; trying different techniques; trying different methods of where we're going to land the horizontal laterals and those things. And the third well that we've done is actually much better than what I would call a science well. But Rex is going to comment on those wells, since they clearly are still the operator until January 1, I'll let them make the comments.

Operator

Our next question comes from Jessica Chipman with Tudor, Pickering, Holt.

Jessica Chipman - Tudor, Pickering, Holt

Looking at slide seven on your quarterly data book and production volumes by region, you can see in the third quarter that most volumes are down. I just wanted to see if you could give us some sort of clarity on where you're expecting volume growth, so that next year looks flat to slightly up.

Steve Malcolm

The majority of the growth next year, it will be a combination of a couple of things. Several things happened as we've decreased our drilling. We actually had some shutting in the Powder River in September, which took off about a Bcf a day or so. But from that, a lot of our growth next year will be in the Valley, and in the Highlands and in the Barnett. There will be a slight growth in the Powder, but most of the remaining part of our growth will be in the Valley, Highlands and Barnett.

Operator

(Operator Instructions). Next question comes from Faisel Khan with Citi.

Faisel Khan - Citi

I just wanted to make sure I understood, reconciled your cash position that you had at the end of the third quarter, which I believe is $1.65 billion to your guidance for end-of-the-year liquidity. It looks like your guidance at the end of the year calls for a cash [drop]. It looks like you built cash in the third quarter. Maybe if you could just clarify that for me, that'd be great.

Steve Malcolm

Faisel, our guidance for ending cash is on slide number 20, I believe. And year-end cash balance, unrestricted in the U.S. 675 to 875, that balance you see also includes international cash and some MLP cash. But we do expect a modest cash drawdown in the fourth quarter as a result of some capital project spending; but no material change.

Faisel Khan - Citi

What was the total cash outlay for acquisitions this year?

Don Chappel

Steve, the Eastern Piceance deal was 258.

Faisel Khan - Citi

And that was the only acquisition you did this year?

Steve Malcolm

Right, the others and the Marcellus, both E&P and Midstream.

Operator

We will move now to Holly Stewart with Howard Weil.

Holly Stewart - Howard Weil

Just quickly, I guess a couple for Ralph. It looks like your CapEx range for next year is still pretty wide. We're hearing a lot of our companies now increasing rig count. Can you just kind of give us your big picture thoughts on next year? What your plans are for rig count and then eventually production?

Ralph Hill

Well, we're still flat in the Piceance with about seven rigs running in the Valley, and then we have one in the Highlands and that will increase to four during the course of the year. The Barnett is back to four rigs just recently and it should stay at four at this point. So everywhere else is basically flat and as you know, we're just waiting to understand our cash flows for next year and commodity prices before we can commit to any more.

Holly Stewart - Howard Weil

And what are you going to run in the Marcellus?

Ralph Hill

Just one at this point, which will be about 12 or so wells next year.

Holly Stewart - Howard Weil

Okay. And then what's your expectation on timing for, I guess, updating the Street on that?

Ralph Hill

On the Marcellus?

Holly Stewart - Howard Weil

No, just in general, rig count across the basins.

Steve Malcolm

We'll update you at our next call.

Operator

Moving on to Harry Mateer from Barclays.

Harry Mateer - Barclays

Conoco mentioned on their call yesterday that they may consider selling their stake in Rockies Express as part of their divestiture program. I was just wondering if that's something that either Williams or one of the MLPs could have interest in.

Steve Malcolm

They could have interest. I wouldn't express for you today a positive or a negative view of that.

Harry Mateer - Barclays

But it's something you could potentially consider? You would be willing to consider a pipeline acquisition?

Steve Malcolm

Well, from the standpoint of more likely an MLP opportunity, I think.

Don Chappel

I'd just say it comes down to capital allocation question as to where we can drive the highest value.

Operator

We have no further questions. I'd like to turn the call back over to Steve Malcolm for any additional or closing remarks.

Steve Malcolm

I have nothing in addition. Thank you for your participation today and we're delighted with our results. We're very optimistic about the future and we look forward to the next opportunity that we have to talk with you. Thank you.

Operator

Once again, ladies and gentlemen, that does conclude today's conference. We thank you for your participation.

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Source: The Williams Companies, Inc. Q3 2009 Earnings Call Transcript
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