威廉斯 (WMB) 2009 Q2 法說會逐字稿

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 call over to Mr. Travis Campbell, head of Investor Relations. Please go ahead, sir.

Thank you, Karen. Good morning, everybody, and welcome to our second-quarter call. As always, we thank you for the interest in our Company.

We just have a few slides to go over in the presentation this morning. Steve Malcolm will going 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've 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, 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's Northeast Supply 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 generally accepted accounting principles. Those schedules are available and follow the presentation.

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

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 streamlined earnings call. That seemed to go over well last time, and I know there are quite a few energy company calls this morning. So I will be the only presenter, but our entire senior management team is present to answer any of your questions.

So, 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 U.S. production dropped to $3.95 an MCF. That's 51% lower than second-quarter 2008. Per-unit NGL margins improved versus the first quarter, up 75% from the first quarter, but still off 31% from a year ago.

The good news -- we continue to record stable, steady earnings and cash flows from gas pipelines, and we are very optimistic about the future, and we are convinced that the market recovery will drive value creation -- accretion across all of our assets.

Looking more closely at the numbers on slide five, for the second quarter and the first half 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 the relatively low prices we've seen this year.

For the second -- or 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 a 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 a year ago. The primary drivers include, again, dramatically lower commodity prices, losses associated with our Venezuelan operations and investments, and, thirdly, you'll recall that our results in the first half of 2008 benefited from a $148 million pretax gain on the sale of our international assets.

Slide six, please. Reported and recurring segment profit second quarter 2008 versus second quarter 2009, just a few highlights. Under E&P in recurring, the key factors in the second quarter 2009, much lower net realized prices for U.S. E&P production. Again, 51% below second quarter 2008, as well as second quarter of 2009 we had higher DD&A expense, based on higher level of production volumes.

The average daily U.S. production in the second quarter 2009 was 6% greater than second quarter 2008, 4% lower than first quarter 2009.

Under Midstream reported and recurring, the decline in results primarily because of lower NGL and olefin prices and lower NGL equity sales volumes, partially offset by 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 2008 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 -- and the second quarter 2009 includes a $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 2008 included an $8 million inventory valuation adjustment related to natural gas owned in storage.

Slide seven, reported and recurring segment profit 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 2009 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 investment in the Accroven assets in Venezuela.

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

Third column provides, then, revised full-year guidance. You'll note 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 narrowed the range for recurring earnings per share from the earlier range of $0.55 to $0.95. Narrowed that to $0.70 to $0.90. Or, another way of looking at it, we've raised the midpoint of the full-year earnings per share guidance by a nickel.

Slide nine, please. This slide caps our 2009 priorities and the progress we're making. We've talked about these priorities with investors since the first part of the year.

Again, a few highlights. Around the second bullet, driving down costs, we are seeing savings on capital projects. A few examples. In the Midstream area, a $25 million reduction in the total estimated costs on our Wamsutter TXP4 project, and that savings flowed through to our guidance.

In the E&P space, we're 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 will see that we are making progress. We've got a check mark next to Blind Faith, which is now online, and there is a check mark next to Willow Creek, our processing plant in the Piceance Basin, where, as we speak, we are in the process of bringing that plant into service.

And under the last bullet, seizing opportunities, of course we added an E&P component to our foothold in the Marcellus Shale.

So we remain on target to achieve the goals and priorities that we're focused on in 2009.

Finally, on slide 10, we believe that we are well-positioned to weather the economic storm because of our strong financial position, because of the stable foundation of cash flows, because of our ability to adjust spending, and our belief 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 of the Rockies bases.

Remember that Williams is perhaps uniquely positioned to capture value in the NGO market. Our gas pipeline business continues to have great success with base hit expansion projects that are driven by demand from the markets we serve.

And I always want to make the point around our core position in 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 a good place to be. Perhaps not for everyone, but absolutely for Williams.

And certainly, the fact that Ruby Pipeline, it appears, is now more likely to be built, with the El Paso now having a partner, that's clearly a good thing for Williams.

So, 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 will be happy to take your questions.

(Operator Instructions). [Zim Mu], JPMorgan.

Questions on your Midstream -- the 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 low end of the NGL margins. Can you give us your outlook the NGL market?

Sure. First of all, the -- of course, we saw a large improvement from first quarter to second quarter. We saw a very nice increase in margins, mostly on the backs of ethane margins, which has improved dramatically.

You'll recall in the first quarter, we were in rejection in many locations, and here in the second quarter and into the current period, we're 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's in the money for ethylene crackers right now (technical difficulty) for on a cash-margin basis, and so we're seeing a lot of pull on ethane right now, which is driving those ethane margins up and giving us some confidence about where those stand for the balance of the year at this point.

And for -- another question for Ruby, how much have you spent so far? And factoring the equity contribution from your partner, how much you need to put up for finance -- financing the project during construction and what the capital structure will look like after the completion?

I'm sorry, let me clarify. We are not a financial partner to -- 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 a greater likelihood that the pipeline will be built, creating more takeaway capacity out of the Rockies, which is a good thing for Williams since we have a lot of our production in the Rockies.

I'm sorry, I'm sorry. I messed up with [your ways] at El Paso. Okay, and can you comment on your outlook on the Rockies basis?

This is Ralph Hill. The basis is down what we thought would happen 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 will be built 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 $1.00. At that time and -- the next three years or so are 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 shrinking, and our ability to move our gas out of the Rockies is coming true, just like we thought it would be.

Do you expect the basis to widen? If gas prices go up?

We don't think it was -- not like it has sometime historically.

We think that the Rockies is a preferred place to be for transportation opportunities because the infrastructure is mature, in the sense of it's built out already, it's being added to, extra capacity. And there's been a dramatic drop in the production levels that we'll be having 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 thinks it's going to go blow out, either.

Carl Kirst, BMO Capital Markets.

A couple of questions -- maybe start, 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-ins, i.e., are you managing production at all, or should we take the number basically purely at the surface?

We are -- we have deferred some completions, and by the end of the year we will be deferring probably in the Piceance 75 or 80 completions.

And we also are not doing anything heroic to bring volumes on in various areas that we traditionally would have done. So, we are managing production a little bit in that aspect, yes.

That's helpful. And then, just following up on the E&P side in the Marcellus, and I guess the question is, with sort of the dipping of the toe in 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 would want to reassess, perhaps, other bootstrapping opportunities? Or indeed, are you even potentially assessing larger moves into the Marcellus?

We can't predict the future, obviously, but we've studied the basin for a couple of years.

Our technical team feels 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 Atlas deal with our Midstream group, we have seen a lot of deal flow. I think that's pretty obvious. It's going out there for a lot of people.

So we think there's quite a bit of opportunity out there. We can't predict where we will end up, but there is areas we like a lot, and we continue to see a lot of deal flow and a lot of opportunities. It just depends, as always, is there something we could put together that makes sense for Williams and for our partners.

With respect to the bootstrapping versus potentially larger acquisitions, is that something you can answer with respect to bias? Obviously, you will be opportunistic if something great comes along. But do you have a bias towards one approach or the other?

Carl, we'll just continue to be opportunistic and continue to evaluate the opportunities out there. As Ralph mentioned, a lot of deal flow, a lot of opportunities for us to look at things.

But I think a key point to remember is that we are going to be disciplined and we're going to live within our means.

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 has perhaps hit upon more of a traditional cost-of-service model. Is that something that you guys think would be replicable as well?

Well, for pieces of the business, I think that's the case. And it kind of depends on how much of the excess capacity you are willing to grant to the counterparties.

Said another way, in a lot of those deals the counterparty's controlling any excess capacity or has a call on it, and it 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 our Devils Tower business, where we have the excess capacity and are able to price that at market. So those deals are available.

But as you know, there's a lot of risk out there, and we think we need a pretty high return to balance any risk of the construction and so forth that we take out there.

But they are, 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 our money than that.

(Operator Instructions). Faisel Khan, Citigroup.

On the E&P -- the E&P segment, it 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 expect production to kind of trend down at the same rate we saw the sequential decline in the first quarter of this year to second quarter of this year?

And how should we expect that CapEx at E&P to trend for the rest of this year? Thanks.

The CapEx -- we've got guidance out there of between $950 million and $1.050 billion. So we'll stay in that range for our CapEx for the balance of the year.

The way the production looks like -- the way we've looked at it is fourth quarter 2008 to fourth quarter 2009, we think we'll be down approximately 4% to 5% in production, which means there will be some decline in the third and fourth quarter. If you look at it, if we decline about 7% from the second quarter 2009 to the fourth quarter 2009, that would give us an overall decline for the year of 4% to 5%. So that's -- we are staying with that.

I would say that, so far, we have surprised to the upside of that. So it may not be quite that much decline.

And we've also mentioned that in 2010, although we haven't given out guidance yet, we have said that we don't think that 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.

Just looking at the production tax number for the quarter, it looked kind of low at $0.02 an MCF, versus $0.25 in the first quarter. Any reason why the tax -- the production tax rate was so low?

Yes, there are two reasons. One, obviously, lower gas prices is a big part of that.

But we also -- it was offset by the lower effective tax rates. And the way that was, the lower effective tax rate was because of -- we had some ad valorem tax credits that were provided to us by, in particular, by the state of Texas that we recognized in that quarter.

Okay, great. Then just shifting to the Midstream side of the equation for a second, the decision in the beginning of the year to shift, I guess, some of your key pull contracts to fee-based, was that a decision by your customers or was that a decision by you, or was that more of a negotiation?

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

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 that fractionation capacity seems to be a bit tight.

Yes, it certainly is. It has tightened up considerably, and we are very fortunate to have, for a lot of our business, arranged a deal with Oneok via the Overland Pass transaction for most of our product, and have got the capacity we need.

But certainly it has tightened. We're certainly seeing that with our Conway fractionator. We're seeing a lot of demand for that space and running full out. And so, I think there is no secret that in the Bellevue and Midcontinent area, the fractionation capacity is very tight right now.

Great, and then, just on the pipelines, sequentially it looks like operating costs went up pretty substantially. I know you talked about pension costs on the -- in your prepared remarks, but is that all what the increase is or is there something else in there?

This is Phil Wright. We had the pension increase, which was a 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.

Okay, great. 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 -- a little bit higher than we had expected, going into the second quarter.

Faisel, this is Don Chappel. If you look at one of the slides in our data book, we have a cash-flow analysis forecast for the balance of the year. One second, and I'll have the -- I think it's on page 43 of that data book.

We continue to expect that the U.S. portion of that balance, excluding the MLPs, will be in a range of $700 million to $900 million by the end of the year.

Rebecca Followill, Tudor, Pickering, Holt & Co. Securities.

A couple of questions on the E&P side. I'm still going through numbers. I apologize. There is lots of earnings out this morning, so if I've missed something, I'm sorry.

It looks like production guidance is up by just a hair. It was 1125 to 1225, and now it's 1175 to 1225. Is that correct?

That is true, yes.

Does that include -- or did it include previously the deferral of the Piceance completions?

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

Okay. And the reason for the increase is?

We've actually done better year to date than we thought we would, based on our original plan. And because of that, and the flow that we think we'll keep going during the year, is that we are just doing a little better than we thought.

Great. And then, when I'm looking at the volumes by segment, it looks like the biggest decline sequentially is in Powder River basin. Is that the area where we should expect to see the biggest decline just through the rest of this year?

Potentially. What we are seeing is -- it's obviously -- it's just a function of there is a number of wells that are dewatering, both ours and our -- primarily our partners.

So that just, again, that depends on when it crosses over to the gas flow side, but that is where we could potentially could have the -- a decline.

Great. And then, lastly, on the Midstream, on the JV in Marcellus, any updates there? Any changes on where you guys want to spend CapEx or any other thoughts, now that you've had it for a little while?

I guess I would just characterize it, Rebecca, that we've seen a lot of investment opportunity, both on small -- relatively small assets in the area that need to be aggregated and condensed into more -- to be able to access better markets. So we're seeing a lot of relatively small assets the producers are interested in selling -- up, and we've also seen tremendous amount of new investment opportunity for some of the major stepout opportunities amongst producers there that are looking for infrastructure.

So the opportunity is probably bigger, or it's certainly a lot more opportunities than we thought going in. And, it's just -- there's just a lot of unknowns, as you can imagine right now, waiting on various issues around water disposal and so forth that are relieving people from making big commitments that are still kind of hanging in the wings a little bit.

But certainly, much more opportunity than we expected going in there, in terms of both acquisition and grassroots investment opportunity.

When do you think that you'll have a feel that you'll be able to give to us on what kind of capital you will ultimately put into that business -- or that area?

I think that's going to be evolving for a long period of time. I think that will be changing for quite some time.

Ray Deacon, Pritchard Capital. I do apologize. He has disconnected.

Lasan Johong, RBC Capital Markets.

Couple quick questions. There's a lot of discussion around about high storage levels causing pipeline pressures to build, which obviously could lead to forced shut-ins on gas wells.

So, I know you had mentioned that the Rockies capacity, takeaway capacity, is increasing, so that's probably not going to happen to your Rockies basin, but I just want to double-check if you're seeing any of that phenomenon happening in any of your other regions, number one.

And number two, what consequences that has for your Midstream businesses. Obviously, if EMP shuts in, it curtails gathering and processing revenues, and if that is the case, if there are minimum thresholds that EMP companies have to pay you to maintain or keep those contracts open. I know that's a lot, but if you could start with that, it would be great.

This is Ralph. Let me take the first part. I do think what we've seen in the Rockies in the last two months that 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 we've seen -- and 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 yet, any pressuring off or any of that at this point, and we don't think the Rockies really will do that, particularly with our transport capacity out of there.

And I'll let Alan take the second part of that question.

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 [NOM] based on a certain design pressure. And we're capable of delivering into that design pressure at all of our locations.

And generally, most of our larger customers -- and we do -- the bulk of our revenues do come from large customers -- have downstream capacity on the pipelines to serve their production needs, and so we are not seeing anything -- we're not seeing any reduction in production right now and are not forecasting any on our systems due to storage constraints.

So, I'm not saying that won't happen, but we're certainly -- we are not seeing any remnants of that or any signs of that right now.

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

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 cost management, so I'd say the primary driver, other than just surprises, would be pricing and margins.

Okay, so it's really all in your control.

Pricing and margins are not within our control.

Outside of pricing. Outside of pricing.

Yes.

Mark Afrasiabi, PIMCO Equity Advisors.

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

If he's looking for the E&P side, we have achieved what we thought we could do in a lot of our areas. The capital side of the world, we are down about 26% so far. Maybe more in our capital costs, like a well basis this year versus last year.

I think if you look at our lease operating expense, the second quarter 2008 is like 13% below what we saw in -- I'm sorry, second quarter 2009 is about 13% below what we saw in 2008, and we can see all that continue to trend down quite a bit.

So we're feeling very positive about what we thought could happen and what we've seen actually happen so far.

I was thinking maybe more so on G&A and corporate and other areas of the business where you had grown OpEx in the last several years in a better environment.

We continue to look for opportunities to cut costs. We have not yet made any wholesale cuts in our workforce because coming into this downturn, we were short. So, we continue to look for ways to cut costs, have taken some steps. I think those are reflected in our guidance and we will continue to operate our business in a very disciplined manner.

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

Yes, this is Steve. 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.

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