威廉斯 (WMB) 2008 Q2 法說會逐字稿

Good morning. My name is Stacey, and I will be your conference operator today. At this time I would like to welcome everyone to the Williams second-quarter 2008 conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (OPERATOR INSTRUCTIONS). Thank you, and I would now like to hand the call over to Mr. Travis Campbell, head of IR. You may begin your conference, sir.

Thanks to everybody and good morning. Welcome to Williams' second-quarter 2008 earnings call. As always, thanks for your interest in the Company. As you probably already figured out, we will not be reviewing a ton of slides this morning. Even though it feels like just last week, we had a chance to do a much deeper dive into our businesses on June 25th in New York. So today our plan is to have a pretty crisp call. After my comments, Steve Malcolm, our CEO, will go through some thoughts and then have our CFO, Don Chappel, briefly talk about the great second quarter results and any updates to guidance since the New York meetings in June.

Even though they don't have any prepared remarks this morning, all of the business unit heads -- Phil Wright, Ralph Hill and Alan Armstrong -- are here and available to respond to your questions.

Before I turn it over to Steve, please note that on our website, Williams.com, you will find a few slides we'll talk from this morning. Additionally, there's another deck labeled supplemental materials that contains all the data we typically provide each quarter. The second quarter press release and all the accompanying schedules in the second quarter 10-Q are also available.

Slide number two and three, titled forward-looking statements, disclose various risk factors and uncertainties related to the future operations and expectations. Actual results, of course, will vary from those expectations due to the factors disclosed. Please review that information as well as the information on slide number four, oil and gas reserves disclaimer.

Also included in the materials are various non-GAAP numbers that have been reconciled back to generally accepted accounting principles. Those schedules are available and are integral to this presentation. So with that, I'll turn it over to Steve.

As always, thanks to those of you on the call for your interest in our Company. We are very pleased to have the opportunity to discuss Williams' very strong performance in the second quarter and year-to-date and, as well, our bright outlook for continuing value creation.

Obviously, our businesses are hitting on all cylinders and great evidence of that is the fact that consolidated second-quarter segment profit is up 60%. Our E&P business generated record recurring EBITDA of about $650 million in the quarter. We added 1.5 trillion cubic feet to our 3P reserves through two bolt-on acquisitions, one in the Piceance and the other in the Barnett Shale.

Our finding costs continued to be well below the industry average, and we successfully complete nearly 100% of the wells that we drill.

In our Midstream business we benefited again from margins that were very strong but, as well, from higher fee-based revenues as well. Midstream business is generating robust cash flows. We have a high degree of optimism around the many opportunities that we are pursuing, particularly those in Canada, where we see opportunities that fit very well with our current operations and fit with the expertise that we have there around the oil sands.

In our Gas Pipeline business, we continue to see opportunities for customer-supported and demand-driven expansions. Of course, this business plays an important role as a consistent generator of cash that helps fund our higher return projects. So again, we couldn't feel any better about our performance and our businesses.

Having spent an entire day telling our story in New York on June 25th, I only have one slide that I would quickly like to review this morning. The essence of that slide is, I believe that we have the right strategy. We've certainly created a prime position for ourselves from which to execute that strategy, and we have a strong track record of crisply executing around our strategies. Our operations span the natural gas value chain. I think it's a good time to be focused on natural gas. The outlook for natural gas is continuing to get better and better. There's an obvious growing role for this clean burning, domestically fueled -- produced fuel. So it's a good time to be in natural gas.

Scale is a key element of our strategy. So you see Williams in basins and markets where we can be at or near the top of the market participants. I think our strategy has legs, it has longevity when it comes to value creation. Williams is and has been turning in performance at a level that drives value. Clearly, our strategy is designed to deliver sustained value creation in the future. We have created that prime strategic position from which to successfully execute our strategy. We have an abundant, expanding slate of opportunities within our reach, and that slate of opportunities continues to grow almost each day.

Our portfolio creates value and opportunities, and I believe it mitigates risk, and our businesses fit very well together. Over the past six years, we've been all about crisp execution. So you see us continuing to deliver earnings growth with a very strong outlook for the future. We're performing well in a variety of commodity markets. We are growing production. We have low finding costs and near 100% drilling success. And it's not just a Piceance story. As well, with Powder River production up 41% in the second quarter, and as well with the contributions from the Barnett Shale, a very diverse story there in terms of our production.

We're completing our projects on time and on budget as we make disciplined investments in production and processing and in key infrastructure. I believe that we're successfully managing the basis differential. As we've said many times, we are a Rockies producer, but we're not a Rockies price taker, and 83% of our domestic production gets better than Rockies prices. And, as we've done in the past, we are willing to pull other value creation levers. A great example of that is the fact that we just recently completed our $1 billion share repurchase program.

So, with that quick review, I'll turn it over to Don.

Before I dive into detail slides, here I'll just note that net income was $437 million for the quarter at $0.37 a share. More importantly, our adjusted earnings after eliminating nonrecurring items and mark-to-market effects were $406 million or $0.68 a share, up 58% on a per-share basis. For year-to-date purpose -- period, $747 million or $1.25 a share, up 69%. Very strong quarter, very strong first half and we're very enthusiastic about the balance of 2008, 2009 and beyond.

Let's dive into the next slide here, and this is slide number six. This is second-quarter segment profit. First I'll just point at the total near the bottom, the segment profit after mark-to-market adjustment that's highlighted in blue. You can see $902 million on a recurring basis, $624 million a year ago, an improvement of $278 million at 45%. The reconciliation between reported and recurring as well as mark-to-market is included in the supplemental deck.

Just to go up to the top there, E&P posted $471 million of recurring segment profit. It was even higher with the gain on the (inaudible) asset sale. But on a recurring basis, that's up $262 million or 125%. We are quite delighted by that. We saw a 24% increase in domestic production and related sales, which delivered about $105 million of additional segment profit. We had higher average realized gas prices, about $8.06 versus $5.39 a year ago. The totaled about $273 million of contribution.

Along with these higher volumes and prices were higher costs which partially offset these benefits. DD&A was up $51 million, operating taxes $33 million and LOE up $12 million. But again, very strong earnings posted by E&P and, perhaps even more importantly, a very, very strong production increase at 24%.

The hedges that affected E&P's results are included in page 14 of the appendix, both for the quarter as forward periods.

Taking a look next at Midstream results, Midstream results were also very, very strong. Higher olefins margins contributed $26 million, higher NGL margins $18 million for the quarter, higher fee-based revenues $23 million. And, these were offset somewhat by higher O&M costs. Again, Midstream's results at $233 million were up $42 million or 17% from the same quarter a year ago, which was also a very strong period. Midstream is very well positioned to continue to outperform it peers and deliver very strong earnings and value.

Gas Pipeline results were also up, up $13 million or 8% for the quarter, very steady and improving results.

Gas Marketing results were off somewhat. And let me remind you, we've been working through were exiting positions that we considered legacy after the sale of our Power business and the shrinking of the scope of the Gas Marketing business. And we've largely exited those legacy positions. As well during the quarter, we had -- gas was injected into storage, sold forward to lock in prices and the profit. However, an interim decline in gas prices caused that to be written down to lower cost to market. That's a timing issue that will come back next year. As well, we had some inventory gains that were eliminated. Again, E&P sales gas to gas marketing, but the profit on that gas is eliminated in the Gas Marketing segment. So those were a couple of the items that contributed to the loss for the current quarter. I think, most importantly, we now expect Gas Marketing to be about breakeven for the balance of 2008, as well as 2009.

Turning next to slide number seven, year-to-date results, again focus on the total for segment profit after mark-to-market adjustment, $1.674 billion, up $558 million or 50% from the prior year. And then, looking at each of our business units, E&P is up 97%, Midstream up 40% and Pipe's up 14%. So again, very strong earnings. Finally, Gas Marketing on a year-to-date basis posting a loss of $13 million, relatively, insignificant.

Let's now turn to slide number eight. I'd like to just touch on our updated guidance. We've made a modest adjustment to raise the lower end of our guidance for 2008 from a range of $2.30 to $2.80, up to $2.35 to $2.80. Let me remind you that we have not changed our price assumptions for the year, so this is centered around a range of $100 to $120 WTI crude and $9.00 to $10.50 NYMEX gas. And the details, including the basic-level details, are on slide 41 as well as included in the press release.

Again, at $100 oil for the year, which, again, we are well through the year, and $9 NYMEX gas, we're comfortable with the bottom end of the range. And certainly, if we average $120 and $10.50 on the gas, then the higher end of the range is within our reach.

Just turning the page to 2009 -- and again, we have not made any changes in our price assumptions since June 25th. However, some increase in E&P production as it relates to those acquisitions boosted our segment profit and our EPS range somewhat. So we are now at a range of $2.10 to $2.95 versus the range we had just six weeks ago. Again, the price deck that we're using in 2009 is a range of $80 to $120 on WTI crude, and NYMEX on $8.00 to $10.50. So again, with $80 oil and $8 NYMEX gas, we think that $2.10 is within reach. Certainly, is we see $120 crude and $10.50 gas, again, then we're closer to $3.00.

Let's just turn the page to slide number 10, some of the detail. Again, some very minor adjustments from June 25th in terms of our segment profit guidance. But I think, importantly, you can see here despite the fact that we have assumed lower prices in 2009, we improved somewhat. Our profitability despite those lower prices and lower margins. So, if we enjoy higher prices or constant prices between the two years, I think you would see very strong gains in 2009.

Just turning the page to slide number 11, again, some modest adjustments there, really changed only to reflect the acquisition of the assets in the Barnett Shale by our E&P business.

The next slide, number 12, cash flow -- we've updated that again to reflect the changes in both our segment profit guidance and our CapEx. Again, this lays it out as we're thinking about it today. Certainly, we have a number of options and levers that we can pull. I would just also note that we completed our share repurchase that the Board authorized a year ago. In July of 2007, the Board authorized a $1 billion share repurchase. We have now completed that. We bought back nearly 29 million shares at average price of $34.74, which, up until a few weeks ago, looked to be very attractive. Today it doesn't look as attractive, and I'm sure that we'll look back upon this in the future and be quite delighted with the share buyback program.

Let's turn the page to slide number 13. Certainly, we've had some questions and ongoing concern about Rockies prices, and I'd just like to lay out for you where we are at graphically. So on the left is our consolidated position, our long position in E&P, our short position in Midstream as well as the effect of our hedges. And then to the right will be Rockies.

So just to walk you through it again, the green, about 1 billion cubic feet a day, is our gross position net of fuel and shrink, and production taxes on E&P. That green area is financially hedged, principally with collars, so there is some variation within that. But, you'll see those collars in our materials, and most of the prices are still quite attractive at the bottom end of the collar with very attractive ceilings on those collars. I'd also note that we do have some what we consider to be legacy hedges, about $70 million a day at a price of about $4 that's included in 2008.

The yellow would be the unhedged E&P volume. The bluish color below the line is the short Midstream position. So you can see, although we produce over a Bcf a day, our length is more in the 100 million cubic feet a day range. That's both for 2008 and 2009. If you move over to Rockies, you can see that after we transport our gas out of the Rockies and sell it in other basis, the amount that's actually sold in the Rockies is substantially reduced. So we are selling in the Rockies, the top of that green bar, so somewhere in the $300 million range. We've financially hedged a piece of that. The yellow, again, is the open position, the blue is the Midstream short position. So you can see we're basically flat in 2008 in terms of Rockies basis.

By 2009 we are slightly long, but not very long at all, in terms of Rockies basis. So again, Rockies basis, when it widens, is detrimental to our E&P business but helpful to our Midstream business. And it is pretty much a wash at the Williams level. So I thought that was an important point to point out to you.

With that, I'll turn it back to Steve for some comments and questions.

So all three of our businesses generated excellent second-quarter results. We continue to be confident in our ability to continue to post strong numbers. Our business unit leaders are here and we are looking forward to your questions.

(OPERATOR INSTRUCTIONS) Carl Kirst, BMO Capital Markets.

Good morning, everybody, and nice execution on the quarter. Two questions, if I could, the first an operational question I meant to ask from the June meeting. But, Ralph, with respect to all of the clamor that's going on around the Roan Plateau, the environmental issues, do you see that moving from a disruptive standpoint from the lease sale to, potentially, activity? Is that anything that you guys are worried about?

Well, I believe the lease sale is scheduled to go off August 14. Obviously, we have our position all around the Roan. We are evaluating it closely. I think the record decision has some very onerous terms in it, so I'm not sure how fast the pace of play of development will be on the Roan. That's one of the considerations we're taking into, as we look at the upcoming lease sale. Does that help, what you (multiple speakers)?

It does. I guess the upshot is, I think it's still probably too preliminary to know what type of impact we might have. But certainly, nothing that you are seeing that could immediately be detrimental to your guys' production views, say, perhaps in 2009?

No, we don't see that detrimental to anything we have in the existing valley or in existing what we call the highlands areas. We don't see -- that's a separate EIS, separate record decision, separate rules. Nothing that goes on in the Roan will affect anything else we have in our other areas. And as you know, since the Roan is an open outcry bidding thing, who knows who will win what and when that happens? But all the numbers you see for us going forward are based on the highlands and the valley only and we don't think it's going to affect us.

The second question and sort of an open one to Steve, et al, obviously one of the things that has changed over the past five weeks has been the valuations in the E&P world, you guys included. And not under the guise of what have you done for me lately, but here we've just now closed a share buyback program -- a $35 stock is at $31. Maybe I can ask it in kind of a generic sense that, with some of the shifts in valuation, does it increase appetite for acquisitions, including your own stock? Maybe I'll just ask it that way.

We are in the midst, here, of a strange and challenging market. And it has certainly had an impact on valuations. I don't think that we want to change our strategy and our focus just because of the last five weeks, as you mentioned. We're going to continue to be investing in these wonderful projects, and I can't emphasize enough how the slate and the visibility around those projects continues to grow.

However, we have pulled the levers periodically to create incremental value and we'll continue to look at that and evaluate it as we consider additional investment in projects that will create long-term value for our shareholders.

Rick Gross, Lehman Brothers.

I want to ask a question on the Powder River. The volumes there have been very, very strong. I'm just curious what the driver is there. Obviously, the well count was up in '07, and you probably got some de-watering and de-bottlenecking of the pipeline grid, but what's going on there? And are there any nuances about the wells that you brought on that are de-watering, the bottlenecks that you alleviated? Are you getting close to filling up and creating more of a bottleneck that you're going to need more outlet capacity? How do we interpret a 41% increase in the Powder River?

I'd interpret it very good. We feel very positive about the Powder, as I've mentioned for a couple of years. We were waiting on several things to happen. Is was, the Big George, as you know, is a much more prolific coal; thicker, more charged, greater gas content. And, it is coming on much better than the Wyodak coal. That, combined with the Fort Union gas gathering de-bottlenecking which we did, we think, allows for the Big George to really kick in.

And, as the slide we showed on June 25th, the Big George compared to the Wyodak at this stage of its growth is immensely better than the Wyodak's growth. And the Wyodak was obviously a good coal.

So we have been very proactive in signing up for transportation capacity away from the Powder. We are working on new capacity away, so we don't see that as a bottleneck for us, at least, going forward. And, we do hope that we can keep this pace of drilling up. We believe our partner wants to do the same thing. Again, there's always a little de-watering time, but the areas we're look to be very prolific. So we're very happy with it. It probably won't be 41% every quarter, but we do expect the Big George to continue to be a great coal for us and see our volumes grow very strongly.

Are the wells coming in better than what you'd have modeled?

They are really coming in at about that point, 5 Bcf we talked about. So no, they're not really coming in much better. It's just that it's amazing, the impact of de-bottlenecking that gathering system, what that did to help us on pressures, and also just the dewatering of a lot of the coals at the same time.

Do we think we'll get more rigs into the field, either in the Piceance, where you are a little bit higher than your 25, and whether you will get more into the Barnett now that you've got a little bit more acreage?

We're working on that right now. As we mentioned when we did the Sandridge acquisition, we believe we would add at least two into the highlands and we mentioned two more rigs in the Barnett, at least, and we're working on an additional rig. So I could see us more like up to maybe even seven rigs in the Barnett and 28 or so in the total Piceance. So we are looking to add that, and that's part of our analysis as we're going through is working on a 2009-plus plan.

You finished the share buyback. Are you going to authorize a new one? You've still got about $2 billion in cash. By our estimation, you still generate some pretty good cash flows, and the stock is lower than your average purchase price. Are you going to go to the Board for another authorization?

We'll continue to evaluate, Rick, as we look and consider and evaluate some of these wonderful capital projects that we've talked about in the past.

Sam Brothwell, Wachovia.

A question for Alan. I noticed you kept your outlook for the rest of the year in Midstream where it was. I'm just wondering if you could speak a little bit to how you see the near-term outlook there, and particularly what you see going on in ethane.

Ethane, as you know, has been very, very volatile. In fact, in the last two days, it's come off about almost $0.18 per gallon in the last two days. And, that has been caused by some of the heavy crackers that, in the second quarter, we're out buying ethylene because the heavy feedstocks were upside down in terms of margins, so they're actually buying ethylene. Today they are back buying butanes and propanes and chewing those up pretty quickly and now are selling ethylenes into that market.

And so I don't know how long that will last before the butanes and propanes, price pressure on those, turns around. But overall, to answer your question on ethane, we certainly are continuing to enjoy continued exports in the ethylene derivatives and don't see that necessarily turning around, and so I expect things to stabilize. Basically, ethane's correction in the last two days has just put it back in the money relative to butanes and propane. So I would expect the demand to remain there. But certainly, that is the soft spot and probably the only reason that we wouldn't be raising guidance any further right now, is just concern over the NGL's as it relates to crude oil.

Looking a little bit longer term, I know you are adding quite a bit of processing capacity, including ethane cut, in the Rockies. Has your longer-term view changed at all relative to that?

We continue to study that very closely, as you know, but we haven't changed our perspective on that.

Faisel Khan, Citigroup.

On the Piceance, I just wanted to get a clarification in terms of how many wells do you guys expect this year in the highlands in '08 and then in '09?

And the highlands, we were currently scheduled to be in the 120 range or so in '08, 100 to 120. And next year -- we are still working on that, but we hope to have that more in the 175 -- 150 to 175 range, possibly more. We're just not quite done with all of our rig contracting, and we're still in some of the areas delineating the field and we are moving much more to pad drilling up there, but there's still some areas that we need to understand first, before we can fully commit to how many wells we'll have there. But as I mentioned, we're working through that and we should definitely have that by the next call. We hope to at least be in that range.

Just on the Midstream side of the equation, the large ramp backup in NGL equity sales to, I think, [366] million gallons seems to be trending a little bit higher than what you guys were doing last year. Can you just comment on what's going on there? I know you had some plant outages in the first quarter, but I just wanted to figure out what caused the larger than expected ramp back up in production in the second quarter.

Just second quarter to second quarter comparison?

Yes.

Mostly, it's just that all the plants have been up and running full-bore. We did have some maintenance outages in the second quarter of last year, so we really hit pretty well full stride this year. Probably, though, the one major difference beyond that is the -- we instigated a new takeaway at our Wamsutter facility. We got a takeaway over to a CIG Rollins plant there, so we're taking about 80 million a day over and processing at that plant. So that's incremental capacity, in effect, that we are leasing out, in effect, from the Rollins plant.

Is there any update on your negotiations on the Canadian project side? Are you still looking at a keep hole sort of contract or a fee-based contract? Any sort of update there?

Yes. The modeled that we have been pursuing up there, the model we have up there, would be fee-based to balance out the current keep hole business that we have up there. Things are progressing very well in those negotiations and hope to go to report something in the not-too-distant future on that.

Shneur Gershuni, UBS.

Don, you mentioned about the gas marketing business. So effectively, this quarter, you injected gas in and the value of the inventory declined. But you basically have that margin locked in, and that should obviously be realized in the first quarter of '09?

Yes, that's a factor in the current quarter, as well as, as I mentioned, gas sold and still in inventory -- gas sold from E&P to Gas Marketing for future sale, including that which is in storage gets reduced back to cost. So it gets marked down to cost, and then that profit is recognized by Gas Marketing when it's sold.

Just with respect to NGL -- sorry, everybody keeps asking this one here. But are you guys experiencing a de-linking with respect to oil? And, is there any specific reason why your operations would have a different margin than some of the major indexes, like a (inaudible) and so forth, with respect to margins?

First of all, I mentioned the lowering that we had on ethane here recently. But what I failed to mention was the run-up we had just prior to that. We saw ethane go up to about -- almost 45% of crude oil, which was above historical norms, in the June time frame. And then, we've seen it come back down, it's probably around 40% or 41% now, which is slightly below that, to about the same degree. And as I said, I think we'll see normalize that now that it's back as the lower-cost feedstock for the crackers.

So, even though it's been volatile, I expect that to level out somewhat. In terms of why our margins are different sometimes than a lot of our peers, first of all, most of our business is keep hole. In terms of the commodity-based contracts that we have, most of them are keep hole. So, for those commodity-based contracts, you'll see competitors' margins being percent of liquids, where they are just taking the actual margin on the liquid they sold versus ours are the spread between the gas and the liquids. So that's a major difference.

As to difference between ours and other keep hole competitors, the main difference that we enjoy is the basis spread in the Rockies is a much bigger component of our production than most parties'. So we see our margins generally being pretty high on the keep hole side relative to other keep hole margins because of the Rockies basis differential. And you'll see that actually improve even more, that spread even widen, as the Overland Pass line comes up, which will kick up our NGL margins by about $0.085 per gallon from those Rockies base production (inaudible).

So I guess that is why your performance could differ from, say, [Mount Bellevue] and so forth, if you were just to use those index prices?

That's exactly right. So you'd have to take a Rockies gas price into a pretty big chunk of our volumes there.

Just one final question with respect to cash flow. I'm not sure if I understood Steve's response before. But the buybacks, Don, you had shown that you have cash flow and you said that you're potentially evaluating other projects. But it appears to me that there's cash flow beyond the projects that you are evaluating based on the slides that you put out today. Would that be something that the Board would consider very encouraging with respect to extending the share buyback program?

I'll just comment again. Of our cash balance there's about $500 million that's international, some of which is required to support the international operations. Some is excess, and that has been earmarked for those Canadian opportunities. We are bringing it back to the really domestic cash balance. It's closer to $1 billion, not $2 billion and I think most of that has been earmarked for projects. So, as attractive as a buyback is, we would have some of choices. So we'll continue to consider all the options that we have and try to pull levers that we believe will create the greatest long-term value.

Just to clarify, basically, your consolidated balance sheet cash flow is not necessarily completely available, as it would appear?

I think if you look at one of our slides in the back you'll see that we do back out some customer deposits, as well as the international cash, which is, again, earmarked for either supporting -- and this is on slide number 38 in the supplement. There's $557 million that's either MLP cash or international cash that's largely international cash. And then, there's $119 million of customer margin deposits. So that's almost a $700 million in the cash balance you see on the balance sheet. And then, our capital spending exceeds our cash flows. So that continues to work that balance down.

There are no further questions at this time.

Okay, thank you. We're very pleased with our second-quarter results. We're excited about the future, committed to continued crisp execution around our strategy. And we'll continue to evaluate the various levers that we might pull to create incremental value for our shareholders. So, thank you for your interest.

This concludes today's conference call. You may now disconnect.