威廉斯 (WMB) 2011 Q3 法說會逐字稿

Good day, everyone. Welcome to the Williams Companies' third quarter 2011 earnings release 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.

Thank you, and good morning, everybody. Welcome to our third quarter call. As always, thanks for your interest in the Company.

As you no doubt know, we released our results yesterday afternoon after the market closed. Also yesterday, Alan, using a few slides, had some commentary about our results, the new guidance, and growth opportunities. That audio commentary and the slides are available on the website.

So, on our website, williams.com, you should be able to find a number of things that were posted yesterday afternoon -- the earnings presentation with audio commentary and a podcast by Alan, the data book that contains our usual information we make available each quarter, the press release of our third quarter results, and our analyst package. Also, for your information, the third quarter 10-Q has been filed as well.

Because we had commentary yesterday, this morning's call will be fairly brief. I know there are a number of other companies hosting calls this morning. So, we'll go quickly to your questions, so this call should be fairly short. In a minute, Alan Armstrong, our President and CEO, will make some brief comments, after which we'll open the lines for questions.

Be aware, as always, all of our business unit heads are here and are available to respond to questions after Alan's remarks. Here with me today are Ralph Hill, who heads the E&P company; Rory Miller, who oversees Midstream; and Randy Barnard, who heads our gas pipelines. Also, Don Chappel, our CFO, is here and available.

On yesterday's presentation, there were forward-looking statements on slide number 2 and 3 and a disclaimer of oil and gas reserves on slide number 4. Those are included in our data book. Those are important and integral to the Company, so you should review those. There are also non-GAAP numbers included in various presentations. Those have been reconciled back to Generally Accepted Accounting Principles. Those reconciliation schedules are also available and follow all of our presentations.

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

Great. Thank you, Travis. And good morning, and thanks for joining us.

First of all, a great quarter, solid performance and significant growth in all of our segments. Certainly, we're excited that our continued better-than-expected cash flows and our infrastructure business have now provided us with the option to go directly to a spend without an IPO if we don't see the markets become more stable and supportive of IPO-ing.

In the quarter, certainly, you started to see the benefit of a lot of our projects that we have invested in in the last couple of years really starting to kick in, really across the board. Certainly, the Bakken is kicking in for E&P.

The Perdido Norte project really started to pick up volumes and helped to fill up our Markham facility and, as well, our Echo Springs facility that's now just had its 1-year anniversary of the new train being built there. We actually hit a record in the quarter of 41,000 barrels a day and are now operating a little over that. So, you should expect to see more of this to come as these projects that we've been investing in continue to kick in.

Finally, our business really is perfectly positioned to reap the benefits of this US turning to natural gas. I think you are going to continue to hear more and more about that. Our infrastructure will be very well positioned to help arbitrage the tremendous spread between natural gas and oil-based products and as well, it's positioned there to provide services to get natural gas into the critical markets and to buy critical access. We're certainly starting to see a lot of strains on the infrastructure in some of the growing basins like the Marcellus, where infrastructure has become critical to getting the production on.

So, we're very excited about where we're positioned right now and excited to talk to you about the quarter. So with that, I'll turn it over to questions.

Kristi?

(Operator Instructions) Jason Gilbert from Goldman Sachs.

Good morning, guys. Just a quick question. You know, post the spin of WPX, you're going to be left with the Williams Holdco. It's going have very few assets other than the Canadian Midstream and Olefins, and then the ownership in the MLP. I was just wondering, what's your ultimate vision for how this Holdco structure's going to look? And is there a need for Williams Holdco down the line, or could we expect that to be collapsed at some point?

I'll take that. Well, certainly, Williams Holdco will hold the general partner, obviously, for WPZ as well as a large number of units for WPZ. As we have explained in the past, eliminating that would come with a pretty significant tax realization, and so we really don't see much reason for doing that. We also see an ability to continue to incubate and use Williams Companies in acquisitions as well, when things aren't a perfect fit. So, we like having that vehicle there, and there's certainly a lot of good financial reasons for leaving the Holdco in place.

Great. Thanks. That was my only question.

Thank you.

Ted Durbin from Goldman Sachs.

We're hitting a few from both angles. It looks like your CapEx in the Midstream in Canada guidance is up a decent amount for '12 and '13. You didn't really lower '11. At first, I thought it might be a timing issue. But maybe just talk to -- I think these numbers are higher than what they were on the analyst day.

Yes. I think most of that change -- this is Rory Miller. Most of that change is as a result of us having better definition on the capital projects. We've advanced some of the engineering on that. Those particular projects that are in guidance, that are in those negotiation tables have been pushed up. We also have in that same set of pie charts, the Geismar expansion. I know you are asking specifically about Canada, but the Geismar expansion is in those numbers as well.

Right. Sorry -- yes, I was asking about the whole segment. So, I guess, would you say most of the delta is just Geismar, or is there other Canadian spend as well?

Yes, I don't think we've added any new Canadian things. It's really just more of refining the cost estimates.

This is Don Chappel. Just, again, note that on analyst day, we spoke to Geismar, but it was not yet included in our guidance. So, this is the first time we have included the Geismar expansion in our guidance numbers.

Okay. Then, if I could just shift over to a couple of questions on E&P. I think your last release you had said you were planning to run 8 to 9 rigs in the Marcellus. You're now -- by year-end 2012, you're now saying 6 to 7. Was that just lower rig count just a function of lowering your gas price forecast? Or was there anything else going on there?

This is Ralph. It's a function of a little bit lower gas price forecast, living within our means, and also we're much more efficient with our new fit for purpose rigs than we thought we would be.

Okay. That's helpful.

And then, just thinking about the Bakken, as those volumes come up, how should we think about your -- I guess, your take-away there? What kind of realized prices we should expect, maybe discount to WTI or what kind of realizations there?

We had planned for approximately about a $10 discount, and what we're actually seeing is less than that and in the last few months is more in the $5 range. But we continue to plan about on a $9.80, I think is what's in the actual data book. We are, at this point, through rail, through pipe, through trucking, we are keeping up with our production. And we think we have sufficient capacity to continue with our build up of volumes.

Okay. That's great.

Then last one for me, related to Jason's point was just -- I mean, do you anticipate making any incremental debt pay downs, now that you're not doing the IPO at the WMB level, or are you comfortable with the debt balances that you have standing there at Holdco? I'd just be curious about that. And where are the ratings agencies coming out, as well?

We're continuing to look at potential debt pay down with proceeds from the notes offering that would be transferred up from Williams. You know, we're in regular communication with the agencies regarding our plans. Again, we expect to maintain our investment grade ratings.

Okay. Thanks. That's it for me.

Thanks.

Carl Kirst from BMO Capital Markets.

Thanks. Good morning, everybody. Actually, maybe the first question, just for Ralph. There was a mention, perhaps, of cost pressure going on in the Bakken and that your oil service relationships were helping to hold the line. But I was wondering if you could give us any additional color there?

Well, we've established a relationship with Halliburton for our stimulation services that's dedicated to us, also for our directional services. We have also contracted for a whole new fleet of rigs, fit for purpose rigs, and we've contracted for a rig-moving company. So, we've taken a lot of the model that we had in the Piceance and applied it up there. So, while there are cost pressures, since we were so new to the basin, we feel we have really started to overcome a lot of those. As that model kicks in, we will continue to drive our costs down. So there a lot of pressure up there, no doubt, but we feel with our relationships with our vendors and our alliances with them, we'll be in good shape.

Is there any way to quantify that, as far as what your expectation is on cost pressure, if you will, maybe 2012 just over today in that region?

I think our data book, basically, is we are talking about $9.5 million wells. We initially planned on those to be less than that. Some people are talking about their well costs are over $10 million, $11 million. We don't think we'll see that. So I guess -- we think we'll be able to hold it flat at the $9.5 million, is where we are now. We hope to -- we'd like to see that driven down, but we're not sure yet.

But we've been able to reach a $9.5 million. We've already got a couple of new rigs up there. We also have the alliance with our stimulation services.

Great. Then just a question, if I could, on Midstream Canada, continue to get our arms around it. I know this is a smaller piece of the business, but one thing we noticed that, excluding depreciation, the operating costs had a bit of a spike, and again, this is a small part of the business. But I didn't know if there was any additional color to be had there?

Yes, we did have more planned maintenance, both up in the north and down at Redwater. So, I think it was about -- I think it was around $10 million of additional maintenance capital that we had in the quarter. So, that's probably accounting for what you're seeing.

Okay. Great. Thank you.

Then last question, and Alan, you knew it was coming, so just to go ahead and ask it. With respect to the Kinder El Paso M&A, the things we've seen in other Company filings, is there any additional commentary to add to the whole Southern Union situation, or should we just take prior comments as is?

Well, I'll clarify, but they're not going to be different than prior comments. You know, we continue to be very excited about the infrastructure play here, as the US starts to really take advantage of natural gas. We think that the infrastructure assets are going to play an important role in that, so we continue to be very interested in that. We think we're very well positioned as a Company to grow in that space, and we'll continue to look aggressively at any opportunity we see out there to do that. So, I think you should expect to see us continue to be aggressive in that space.

Great. Thank you.

(Operator Instructions) Craig Shere of Tuohy Brothers.

Hi, just following up a little on Carl's question about the M&A environment. Perhaps, Alan or Don, A, if you all could take a step back and just talk about the broader competition and the market for assets. And B, the potential impact on your near-term capacities now that perhaps you might have, give or take, maybe $1 billion-plus, less cash because you may not do the IPO?

Craig, this is Don. I'd say that lack of IPO proceeds has certainly been something we knew was a possibility during this entire period, so we're not at all surprised by that. Obviously, it does make a difference, but I don't think it's going to make a strategic difference in terms of what we pursue. But obviously, it is a factor, but beyond that, we'll continue to look at assets.

I think as Alan has said before, we're disciplined in our approach. Obviously, it's a market where there's a lot of competition for assets, and we'll look where we have unique advantages. And we have a lot of such advantages, and we'll look to use those.

It seems that most are looking at acquisition as being, if not immediately accretive on a cash flow basis, at least neutral and then accretive very soon thereafter. From a strategic standpoint in terms of the M&A environment, are you all willing to look at things that perhaps in the first year may not help with dividend distributions?

Well, I think certainly there are assets that would be large growth assets in areas that would fit that profile, but for the most part, those are going to be smaller kind of assets that are emerging assets that we would pursue. But we certainly will look to those kind of growth assets in basins like the Marcellus where we feel like we've got great opportunities moving forward, and we think we can build a great business there and a great franchise there. So, we will look at those kind of investments in those areas.

Understood. Thank you.

Holly Stewart from Howard Weil.

First, just on, just following up on the M&A. Sorry to beat a dead horse here. But we did notice in one of the ETE filings that you were having some conversations to buy some of Southern Union's assets. Is that door now closed?

I wouldn't say that the door is closed, but I would certainly say SUG has been clear in terms of their position on that, in the immediate term. So, I think in the immediate term, that may be the case, but I don't think for the longer-term, necessarily. But I would just tell you, we continue to be very disciplined on that, and we think we know what they're worth. We think we are the right buyer for a certain portion of those assets, and we'll just see where that falls out ultimately.

Perfect. And then maybe one for Ralph. Ralph, just looking at my previous notes, I think you thought that Marcellus would get to 25% of production within the next couple of years. You had some delays on the infrastructure side, and you've tweaked your rig count. What's the latest thought process there in terms of Marcellus?

I think you'll still get to that level in a couple years. We feel very confident, especially there -- our results are just starting in Susquehanna, because Lasers is still in the start-up phase. But even with a little lower rig count, we think we'll be at those levels. I think we're going to be very pleased with the Susquehanna drilling, in particular, and our Westmoreland and Clearfield and Centre Counties are also doing better than we thought.

So, if you had to break your rig count out today up in the Marcellus, where are those rigs distributed?

They're going to be -- probably -- well, we'll get to 4 in Susquehanna. It's rising from 2 to 4. And then the Clearfield -- or the Westmoreland County will have 2, but we may move 1 down from time to time to the Clearfield and Centre County area. So, really 4 in the northeast area and 2 in the center part.

Okay. All right. Great. Thanks, guys.

Thank you.

Jeff Coviello with Tellenger.

Hi. Good morning. It's actually John Kiani. How are you?

Hi, John.

Can you talk about your level of comfort or confidence in eventually moving up to an investment grade rating at the Williams legacy or stub company, post the spend with that leverage you see there versus what you would have expected in an IPO scenario? Then second part to that question is, with the spin being what the current plan is, is there a range or certain area of the growth rate range we should expect for the dividend that's 10% to 15% in the spin scenario, based on what balance sheet and leverage you see versus if the original IPO plans? Thank you.

I'll start with the latter part of your question. Again, the 10% to 15% is our guidance on dividend growth regardless of spin versus IPO. We don't think that that really moves the needle into -- in terms of credit rating targets. You know, we're committed to maintain investment grade ratings. The actual ratings will obviously be determined by the ratings agencies. But we think in terms of business risk and quality of assets, as well as leverage and the like, we can consider ourselves to be in a very strong position.

But obviously, the ratings agencies will decide where they come out based on their own views. But again, we're committed to those ratings. We've seen continuous improvement, and we'll see where we go from here.

I appreciate that. On the dividend growth rate range of 10% to 15%, my question was really, does the spin put you in a different area of that range than the IPO would have?

No. No, it does not.

Okay. So, you feel pretty comfortable with the midpoint in either the spin or the IPO scenario?

Yes, we do. Thank you.

Great. Thank you.

Kevin Smith from Raymond James.

Hi. Good morning, gentlemen. With Laser pipeline starting up, is all of your Marcellus shut-in production essentially online now, or where are we at in that stage?

No, this is Ralph. Only a couple wells are online. We have a number of other wells that will be coming online as we prepare our facilities and they prepare the start-up. So we actually just are in the process of turning on our second well. So we have, I think we are reporting -- we think we have about 80 million a day of production that will be coming on over the next several weeks to a month, as the Laser goes through a full start-up.

Okay. Fair enough. By year end, are you expecting to have essentially no, or shut-in, volumes other than just maybe the normal amounts from drilling and completion?

In Susquehanna, yes, absolutely. We think we will be on and that it will be normal drilling and completion, like you said.

Okay. That was largely it, gentlemen. Thank you.

Thank you.

Sharon Lui with Wells Fargo.

Hi, good morning. It looks like Enterprise has secured the commitments for ethane pipeline at the Marcellus. Maybe, Alan, if you could talk to how maybe this project would impact the need for blending projects that Williams is contemplating and also support for the Atlantic access project.

Yes. This is Rory. I'll take that.

Our strategy, I think as you alluded to, in the Marcellus is to actively use blending in the basin, particularly with the pipes project that we've got the proposed Atlantic access. We see that as probably the most cost-effective way to do things. But we do have a project -- I think we talked about it some at the analyst day -- our confluence pipeline that we are proposing as the Williams ethane solution. It's something that would build a runway to a more complete answer, be it some petrochemical crackers up in the northeast, or be it a line such as the one that Enterprise is proposing. So, getting those kind of solutions up there, we see generally as a good thing. If there is a way to unlock value on the ethane commodity for producers up there, they are going to be drilling more) And as a gatherer and future processor up there, that's good to get the drilling going. So, I see any of the solutions up in the northeast as just a positive for the area.

Okay. And I guess based on your volume projections, do you think there's room or a necessity for 2 or more of these projects to actually get completed?

For the long-haul ethane pipelines, is that your question?

That's correct.

Yes. Well, right now, you know, I think that's -- I think 1 is a big first step, probably the pipeline to Sarnia. I think that Mark West is working on, is probably the first tranche of ethane that gets cleared from the area. If we get one of these long-haul pipes to the Gulf Coast, that is probably an even bigger tranche of ethane that's cleared. If you do the math, if you look at the Penn State study where they were forecasting, I think, up to 17.5 BCF a day out in 2020. Yes, you can start doing the math, and you probably could get to 2 pipeline projects. But I think that's a long ways down the road and probably so far out in the future, that's not much of a concern right now.

Okay. And any update, I guess, in terms of securing commitments for the confluence pipeline?

We're talking to a number of producers right now, as with any new project. We don't have any definitive agreements signed. We are getting a lot of interest. It's something that I guess I would say generally is being well received in the producer community up there. So, more to report on that.

Great. Thank you, Rory.

It comes from Timm Schneider with Citi.

Hi. Good morning. It's Faisel, from Citi. Just a quick question on the -- do you have any well results at all from some of your activities in South America?

Just standard -- we haven't done any Vaca Muerta yet, if that's what you're asking. We're doing our standard drilling in our 3 concessions in Entre Lomas, but we do not have -- we have a couple vertical tests we are going to do in the Vaca Muerta. But there's no other -- they're not done yet, so not yet.

Okay. And Ralph, when will those tests be done, do you think?

We'll do some in early next year, I believe, but we're actually monitoring the -- since we have all of the acreage already, we are monitoring the progress of other producers and trying to learn from what they're doing. Then, we'll enter into our program probably at a later date and a more robust program. So we'll have a couple vertical wells we'll test probably early next year.

Okay. Got you. And then I think previously, you guys had talked about a target production rate in the Bakken of sort of 20,000 barrels equivalent a day. Where do you think you guys are in that ramp-up?

In what time frame, I'm sorry?

I think it was 2013, or so, is I think when you guys first made the transaction, it was something along those lines. But maybe I'm mistaken.

I think that was it. I think we would -- currently, we are slightly behind due to the delay in the winter we had and the start-up from all that. But we would expect to gain on that and get close to that level. I don't remember the exact date of that, but we feel confident in our production profile going forward.

Okay. Understood. Then, just a question on Gulfstar. Now, with the tubular bells being sanctioned, how does that project move forward for you guys? Is there any update on what that will cost and what kind of contribution that could bring to the Midstream business?

This is Rory. I'll take that question. We had a reimbursement agreement in place with the customer many months before the definitive documents were signed. So, the project is well underway. All of the major contracts for fabrication and heavy lift and insulation on the pipelines, those contracts are all signed and in place. So, we're well on our way. Steel is in the yards. Things are progressing nicely.

So, that total cost, I want to say is under $1 billion with the pipeline interconnections. I think as we noted, we are still looking at taking on a partner for that. That's probably something that we just want to reiterate. But I don't know if you have anything else on that.

No. That's fine. Okay. I appreciate it. Thanks, guys. I appreciate it.

And we have no further questions at this time. I'll turn it back to you for any closing remarks.

Okay. Great. Well, thank you for joining us this morning. Appreciate the great questions, as always, and the interest in our Company. We look forward to telling you about more growth next quarter. Thank you for joining us.

That concludes our call for today. Thank you for your participation.