威廉斯 (WMB) 2011 Q2 法說會逐字稿

Good day everyone and welcome to the Williams Companies second quarter 2011 earnings release conference call. At this time for opening remarks and introductions, I'd like to turn the call over to Ms. Sharna Reingold, Director of Investor Relations. Please go ahead, ma'am.

Thank you and good morning. Welcome to the Williams second quarter 2011 earnings call. As always, thank you for your interest in the Company. As you know, we released our results on August 3 after the market closed. Yesterday, Alan Armstrong, our President and CEO, had some commentary about our results. This audio commentary and slides are available on our website, Williams.com, so we will not be reviewing our slides this morning. In a minute, Alan will make some brief remarks and we will open the line for questions. Please be aware that Don Chappel, Ralph Hill, Rory Miller and Randy Bernard are all available for any questions.

Please note that all the slides are available on our website, Williams.com. There are forward-looking statements on slide 2 and slide 3 and the disclaimer on oil and gas reserves on slide 4 of yesterday's presentation. They are important and integral to the Company and you should review those slides. Also included in the presentation yesterday are various non-GAAP numbers that have been reconciled back to measures included in Generally Accepted Accounting Principles. Those reconciliation schedules and related information are included in the slides available on our website, Williams.com. With that, I'll turn it over to Alan.

Great. Thank you, Sharna. And good morning. Thanks for joining us this morning in such a busy time in the markets. We certainly did experience a great second quarter. Our adjusted earnings per share was up 39%. We are increasing our full-year earnings outlook based on the strength of the first quarter and second quarter and all of our business segments contributed to the gains that we had in this period. While all our business segments are performing very well, and growing according to plans, we also continue to work hard on restructurings at the corporate level to unlock value for our shareholders. As you're well aware, our WPX IPO, which I'll comment on in just a moment continues to move ahead and we are moving to a growing dividend Company and expect that value to unlock significant shareholder value for WMB.

Our WPZ holdings and our Canadian Midstream olefins give us a very clear line of sight to this sustainable growth for the WMB dividends for years to come. We continue to be very focused on maintaining our investment grade credit and maintaining a very conservative approach to managing our margins within our WPZ segment and this gives us a very clear growth trajectory and also gives us a very clear backlog. We have a very clear backlog of the great projects and we are very excited about for our future. So we've got a great situation as we sit here today. We also have great transparency about where our growth is coming from. So we really continue to be very excited about how we're positioned today in these markets.

And so before taking your questions, though, I do want to briefly address our previously announced proposal to acquire Southern Union Company. At this time, Williams continues to closely monitor the situation and we are evaluating all of our options. We won't have any further comments today regarding Southern Union or the agreement they have with Energy Transfer.

I also have a few brief comments about our planned IPO of WPX Energy. We are ready to go with the WPX Energy IPO. So as soon as market conditions are cooperative, we will be prepared to launch that. At this point, we still plan to get the IPO done in the third quarter and the full spend no later than first quarter of 2012. So as a reminder, though, the purpose of our call today is to discuss our very strong financial and operational performance in the second quarter and our new higher guidance for 2011. We intend to keep today's call focused on those topics and so I appreciate your cooperation on that. We can now open the call for questions. Operator?

Thank you, sir. The question-and-answer session will be conducted electronically. (Operator Instructions) Carl Kirst with BMO Capital.

Hi, Alan, appreciate those comments. Just a very quick clarification, if I could, on the WPX IPO because you just said market conditions are cooperative. Does that mean the SEC has declared it effective? I hadn't looked at that. But I just want to make sure that's not the hold up. It's now just more of your decision on when to go?

Yes, it is just our decision on when we're ready to go; that is correct.

Okay. Fair enough. Thank you. The questions from the quarter really were two-fold, really on the Canada and the Olefins side. And on the Olefins side, you had mentioned that it looks like we are going forward with an expansion of Geismar, as least as far as some of the project capital that's now being put into the guidance. And I was wondering if you could give us a better sense of how you're approaching risk management to that kind of project with respect to ethylene prices going forward? Is part of doing this expansion an off-take agreement with someone or how should we think about risk management in terms of the Geismar expansion?

Sure. I would just first say that remember that on the ethane basis, we're still long ethane as Williams and so that project actually gives us some hedge on the ethane pricing all the way through the ethylene margin. So as we've said before, we're fairly confident in the gas to crude ratio remaining and we're fairly confident in ethane continuing to be a favored feedstock and ethylene continuing to have strength in the markets. What we're not so confident in is about who makes -- who gets what cut of that pie. And so by having ourselves positioned all the way between the gas, all the way to the ethylene, we feel like we're derisking some of those margins and making sure that we're not getting somebody else stuck in between us and the full margin spread there. Having said that, we are talking to a number of parties about off-take agreements and there is a lot of interest around that project. Rory, do you have anything to add to that?

I think the other thing that I would say is there have been a lot of announced projects, probably they're not all going to get built but a number of them can and I think in terms of 2, in terms of when this expansion can get in place, we think we're probably the next tranche capacity that can come into the market. So we think the timing is right and that there's a window of opportunity for us ahead of the other announced projects.

And Rory, I'm sorry, have you guys actually announced either the magnitude or when the expansion would be in service?

We've not formally announced. I think Alan mentioned it in the call, prerecorded comments, that it's about a 40% plus increase in capacity there at Geismar and we're shooting for sometime probably late 2013 for in-service. But as Alan mentioned, that would be going before the Board in September.

Great. And then last question if I could, just on the Canadian side with the Olefins and the upgrader. That looks like more project capital is going into the upgraders as well. How should we -- within that table we had the project capital. You guys also have been pretty good at laying out expected EBITDA and the like. Obviously, it's a little premature at this stage. But should we be thinking about return potential in the same zip code as, say, for instance, the ethane recovery and the 5 times to 6 times EBITDA deployment? Or can you give us a better sense of how we should be thinking about that deployed capital?

I think the returns on the new projects are going to be generally in that same zip code as what we've seen so far.

Steve Maresca with Morgan Stanley.

So I really appreciate that you can't really talk about the situation you're monitoring. I wanted to offer, if I could, one very high level question. Do you feel -- when will we expect possibly to hear something timing-wise or do you feel like you're up against the clock timing-wise to either say we're involved or we're going to try and do something or we're going to move on?

Well, Steve, as I said, we certainly are going to be a disciplined buyer and we certainly have exciting prospects for growth and value creation in our existing strategy and executing our existing strategy and our plan to separate off our E&P business as well. So as I mentioned earlier, though, we're going to try to address in this call the second quarter results and outlook and so we're not -- it's hard to get into a conversation without wading outside of the script on that, so --

Okay. No, I appreciate that. So maybe you can talk a little bit on just with the weakness recently in oil prices and how should we be thinking about that impact on when we maybe start to see switching or moving away from use of ethane?

Don?

Hello?

Sorry, Steve. I don't think we quite understood the basis of your question there.

Just wondering if we're going to start to see with the weaker oil price environment from your vantage point, on the Midstream side, are you going to start to see a move away from petrochemical's using ethane as a feed stock? Have you started to get indications of that? How do you think about that playing out over the next couple of quarters?

I think we've got a long ways to go before we get into that territory. Remember, gas has moved down as well and so I don't think we're anywhere near that ratio that we would get to that. We have seen situations where gas/oil is at times pricing below ethane a little bit but it's got a long ways to go. If people started getting on that, it would bring that price up pretty quickly as well. So I don't really see that in this in the $80 price oil environment and $4 gas. That's still a 20 ratio which used to be something that we wouldn't even dream of and so I think we're a long ways from getting to a point where ethane is not the favored feedstock.

Okay. And then final question. If you could just talk, Rory, right now over the next several quarters you see some of the bigger bottlenecks on the oil and liquids side as opportunities for you guys?

I do think there's a lot of emerging bottlenecks and we're seeing them in a lot of different places and I think there's a lot of infrastructure acquired in the field and we certainly have got our -- have our eye on some of that. And Ralph's team has certainly done a great job of getting their product moved out of the Bakken. But as that field grows and we certainly think it will continue to grow, we think there's going to continue to be a need for a long-term permanent infrastructure in those plays. As well as on the propanes and heavies and just general, pet chem business in general, there's a lot of shifting of volumes that is happening, with this increased volume on both the light NGLs, the heavy NGLs and the Olefins products and so we are positioning ourselves to play in what we think will be a big shift. One of those shifts obviously is Bellevue product to other locations like the Mississippi River markets and so we're certainly right in the middle of opportunities like that and continue to pursue those.

Okay. Great. Ted Durbin with Goldman Sachs.

Just coming back to, I think the first the Geismar question, I saw that you signed an agreement with Crosstex for some takeaway's. Are you locking in any feedstock costs there or is that just more pipeline services and frack and whatnot?

That is obviously a confidential contract but it is a way for us, we think, to get some advantaged pricing in the river. Alan mentioned some of the bottlenecks out there. We think that, that's going to be a very valuable contract for us, particularly with our Geismar expansion.

Okay. And just shifting over to the E&P, you said you had 70 a day I think that's waiting on the Laser Pipeline. What exit rate are you thinking about in the Marcellus as we come out of 2011 and then looking into 2012, I think you had said you're going to run 8 rigs in 2012?

I don't think we've given specific by area, by basin yet, so I'm not sure if I'm -- during this period, I'm not sure if I'm allowed to do that. Clearly, we had a substantial amount backed up in the Marcellus and Lasers, going to come on in September. We also have in Westmoreland, Clearfield, Centre county areas, there's a backup, about another $30 million. So I would need to check and see what we've given out publicly before I can do that. But we obviously have said in the future we expect the Marcellus to grow to be about 20% or so of our volumes as we move forward.

Okay. That's helpful. And then just on the Canadian side, you talked a little about the Sungrader -- the Suncor, excuse me, upgrader downtime. How much did that actually hurt you from a volume and a margin perspective in the quarter?

It was a pretty big blow from a volume perspective. The good news is the margins were so strong over that period and net-net we were about even with what we forecasted. So the strong margins definitely helped there but there's no doubt about it that it's hard to replace 49 days of production.

Great. That's it.

It's as simple as 49 days. We normally would see a couple of days of downtime so you really could call it probably less than about half from a volume standpoint.

Becca Followill with US Capital Advisors.

I apologize. I did not listen to the podcast with the craziness in the market yesterday. And I know you're probably going to talk about it on the WPC call. But can you talk a little about Atlantic Access Project? It looks like that's gearing up again. Can you talk about cost estimates, timing for an open season, a little more color on that project?

I'd be happy to. This is Randy Bernard with the gas pipes. We've been out in the market surveying the interest in that project and are very encouraged by the recent visits. It's predominantly a producer-driven project. It's evolving to recognize the differing geographies of the source or the supply. It's also evolving to recognize the different timing of it, and service needs for the various potential shippers. Bottom line is we think we could have a project to announce by Q4 of this year. Open season within the next 2 months to 3 months, bored out is expiring October for shippers and a month later for ourselves. Possible slippage into Q1 next year but it's very encouraging right now for a late this year announcement.

Any ballpark cost estimate?

It's in the neighborhood of $1.4 billion, but like I said, it's evolving. We may phase the project and there may be some telescope capacity. So as we refine it, that number could move. It's within --

And then --

The slide, once you get around to looking at the slides that were placed on our website, you will see that we have categorized the potential opportunities at the gas pipelines at around $1.7 billion. $1.3 billion investment in guidance, $1.7 billion of possible and Atlantic Access is the lion's share of that $1.7 billion.

Okay. I saw the ones over at the WPZ. And is part of that a reversal of flow on Transco? I'm just looking at the slides, and there's an arrow that points down.

Well, actually, not immediately. But as Marcellus grows, a reversal of flow is truly within the realm of plumbing there. The growth we expect in Marcellus will outstrip the Zone 6 demand eventually, so physical backflow's may happen. But what Atlantic Access offers to customers initially is firm back haul opportunities into transfer of Zone 5 which is its fastest growing markets today. A lot of power gen load coming on, incremental and converging from coal and so it would be firm transportation back haul into Zone 5 with some secondary rights into Zone 6. And that would take their delivery points all the way down to the Georgia, South Carolina border at the end of Zone 5 Transco which would include Elba Island as a potential, if it's ever reversed and it includes [code point] and everything in between.

Michael Karsch with Karsch Capital.

I have two questions. My first one is on the IPO. If market conditions are not suitable, what -- could you just go right to the spin instead of having to do both steps?

Michael, Don Chappel. Good morning. Yes, we could. Again, our current plan is to continue with the 2-step process, IPO, hopefully yet this quarter, followed by a complete spin-off not later than the first quarter but we certainly could change those plans if the market conditions remain challenging.

Okay. Great. And then the second question, I won't make it specific to the SUG acquisition, I'll just ask it overall. If you bought a company which you envisioned dropping down to WPZ, a substantial amount of assets which required an equity raise at WPZ, how do you think about -- let's just say an acquisition takes some period of time to close. How do you think about the accretion when your stock price could move -- your WPZ stock price could move very substantially between the time you agreed to a deal and a close? Are there ways to mitigate that exposure?

Michael, I think as a follow-up to Alan's comments, I don't think we want to go into the Southern Union example but clearly we're looking at that with every capital project that we have put on.

That's why I asked generic -- exactly, that's why I asked it generically. What I'm asking is since you have 2 structures, if you felt like WPZ stock was down too much, could you just hold the assets for a longer period of time at the WMB level and not feel like you have to issue equity to WPZ level?

I would just say I think we have a lot of flexibility. The situation is different. We're faced with changing markets on a regular basis. I think good news is, again, WPZ has a good strong base of assets and earnings and cash flows and great growth. We think it will be a security that investors show strong preference to, got great coverage, so we think it will outperform the MLP space.

I agree.

But there will be times when it's -- the whole market is tough and the MLP market is tough. We'll look to have contingency plans in everything we do.

(Operator Instructions) Bradley Olsen from Tudor, Pickering and Holt.

You mentioned earlier on the call the fact that as a Company, you're long ethane. Just to hit on that, that Crosstex Geismar agreement, what was the thought process strategically when you were thinking about whether to supply Geismar with ethane from a third party versus ethane from either WPZ or from the WPX business?

Yes, I think looking at that Crosstex deal, an opportunity to see a new pipeline built from Bellevue to the river area or at least to a point that could get into our ethane system is a great opportunity for us. Crosstex has got the energy and the will to get that done and it was a way to help get that project going and help make that a reality. We think that also is going to give us a preferred ethane price on the river compared to the other transportation options and so for us it seemed like a no-brainer. They had the will to do it. They had some latent assets there that they could put back to use at Eunice. So it was a very good fit for us and we wanted to support it.

I would also mention there that the -- when we say we're long ethane, obviously that is at various cleared markets and so as long as those markets are connected and fairly liquid between the spots, we're not obviously focused on just moving our molecules of ethane into our locations. So it's more a commercial link than it is actual physical molecules we're concerned about managing.

Okay. As far as the comment that it was good to see a new pipeline from Bellevue built into the region, does that imply that you guys were concerned about potentially being short ethane in the absence of that [Cajun Sabon] extension?

Well, more is always better if you're buying ethane and so --

Sure.

It's -- there's been a pretty significant delta in price between those 2 points and this was an opportunity to really close some of that gap.

Okay. And just jumping to the Marcellus, it looked like there was a -- on the webcast, you mentioned that CapEx budget was slipping a little bit in 2011. Is that associated with some slippage in the timing of Marcellus projects and to that, if it is related to that, if you could maybe just discuss the state of permitting up in Pennsylvania and whether you've come to an agreement on where Springville is going to enter Transco?

Just some general comments about construction in the Marcellus. It is one of the tougher places in the country to build pipeline. The geography there is obviously not flat anywhere across the basin. There's a lot of farming, a lot of human interaction in almost every mile of pipe you build. And so the other thing I would add too around permitting is you have to deal with the townships there as well. So there's another level of permitting that you have to go through which adds some complexity to it. The area in general has not seen the activity that they're seeing now, ever, and so there's a lot of change in the rules, if you will, that adds complexity as well. So it has been a challenge, I think over the last 2 years, we've certainly perfected our model around how to execute significantly but nevertheless, things are moving more slowly than we would like. I think it's the same on the producer side as well.

Everything is a little more challenging to do in Pennsylvania than it is, say, in the highlands of Wyoming. So it is a challenge and we think we're making good progress on it but nevertheless there is some slippage. It's not any indication of the quality of the wells or the success up there which has been phenomenal so far, particularly up in the northeast area. All of the performances exceeded what we had in our plans, so we're delighted with the quality of the wells but the construction is the tough spot.

On Springville, we've got all of our major permits in hand that we need to get that pipeline built. We're under construction right now. We're clearing right of way. We've got some major work going on at the compressor stations. We have all of our permits in hand for our major bores that we've got to do, some waterways and some roads. So everything's on the critical path right now. We feel like we've got a permit in hand for it so that's moving nicely. We do have a couple of minor issues we're working out on the tie-in point to Transco but we're confident that's going to be resolved shortly.

So you guys are still confident that Springville is a late 2011 event?

Yes, we're looking at late 2011.

Sharon Lui with Wells Fargo.

Given the potential for a weaker economic environment and even potentially a double-dip recession, how do you think that would impact the pet chem's willingness to build new steam crackers? Do you think that might delay the timing of their decision? And if so, could the market be over-supplied with frack capacity?

Well, that's a very complex question, obviously. I would just say, first of all, that the market that all of the new olefin capacity is being built for in North America is not focused at North American markets. It's focused at exports. And so the global economy, obviously, is the thing to keep our eye on there and expansions around the globe, I think, are critical to that. So I do think that, obviously, a continued downturn in the economy would have some people backing up. As Rory said, we think we are first in the queue there, so to speak, with our planned expansion but I do think that you would have people checking and double checking if we went into another recession like we were in before. Not much doubt in my mind that, that would be the case.

Whether there is ample cracking capacity to clear the fractionation capacity that's being built right now, I think is a pretty complex question. Clearly, the NGL space is building up very rapidly and there is going to have to be some cracking capacity built to consume that. And so I think it's a great question. I think it's a little early to call that given the very near term events we're seeing.

That's all the time we have for questions today. I'd like to turn it back over to our speakers for any additional or closing remarks.

Okay, great. Thank you all very much for joining us. Again, very excited about our second quarter. We continue to be very confident in the balance of '11 and '12 and beyond, given the transparency that we have to a lot of great projects that we think the fundamentals remain very sound on. And while we didn't hear too much question about the current NGL market today, we can tell you that we remain very confident in the margins as they exist today, partially because of how high the margins got at the end of the second quarter and into the third quarter, how high they've been. We've got plenty of room for that to slip down and still be maintaining our guidance.

So we really haven't seen the degradation in that market here in the last couple of days that you might be expecting. So we remain very confident about both the third quarter and through the balance of the year and excited about the growth in our businesses and the way those are all executing and very proud of the way this organization is executing on both running the business and as well doing things like preparing for the IPO of WPX Energy. So great efforts around here and great results to show for it. So again, thank you very much for joining us this morning.

That does conclude today's conference. We thank everyone for their participation.