Shale Daily / NGI All News Access

Williams 'Marcellus/Utica or Bust' Strategy Pressuring Pipeline Unit

Energy infrastructure giant Williams, whose pipeline partnership holds a bundle of huge natural gas and liquids operations in the Northeast, expects to see "full ethane rejection" through 2015, which will lead to "near-term headwinds" for the unit, CEO Alan Armstrong said Wednesday.

Williams, which owns about 70% of Williams Pipeline Partners LP (WPZ), cut the unit's distributable cash flow (DCF) guidance for both 2013 and 2014 by $125 million and is waiving up to $200 million in incentive distribution rights.

The waiver, which should provide "short-term cash distribution support as a large platform of growth projects moves toward completion," is driven by "historically low" NGL prices and higher natural gas prices, both of which will impact guidance in 2013 and 2014, Armstrong said during a conference call.

NGL margins plunged 50% year/year and dropped 21% from 4Q2012. Ethane equity sales in turn spiraled 87% lower to 23 million gallons from 176 million gallons in 1Q2012; they also were down 84% sequentially. The partnership earned 4 cents/gallon per unit of ethane NGL margins, 89% below the 36 cents earned a year ago and flat from 4Q2012.

Armstrong lamented the near-term earnings shortfall that the operations are facing. However, "growth opportunities" are huge. "We expect that ongoing tremendous North American energy infrastructure needs will continue to combine with Williams' unique capabilities to create a continuing robust set of investment opportunities."

The operator in February had provided fair warning, suggesting then that WPZ's growth projections would be revised (see Shale Daily, Feb. 25). Profits last year were upended in part because of lower-than-expected gas and NGL prices.

Williams and WPZ operate or participate in almost 15,000 miles of interstate gas pipelines, 1,000 miles of NGL pipes and more than 10,000 miles of oil and gas gathering lines. Facilities handle up to 6.6 Bcf/d of gas and more than 200,000 b/d of NGLs.

Williams now expects New York Mercantile Exchange gas prices to average $4.06/MMBtu in 2013, climbing to $4.25 in 2014 and 2015. West Texas Intermediate crude oil is priced at 91 cents/bbl in 2013, then is set at 90 cents for the following two years. Assumed 2013 ethane prices are 28 cents/gallon on average, with prices 2 cents higher in 2014 and 2015. Propane is expected to be about 96 cents/gallon this year, then average $1.15 for the following two years.

A relentless focus on fee-based businesses should help to alleviate NGL issues over the next two years, Armstrong said.

"The recent run-up in natural gas prices reduces the margin in the commodity-based portion of our businesses. Longer term, we think this higher price will drive greater volumes as producers respond to these more reasonable prices."

Williams earned $161 million net (23 cents/share) in 1Q2013, versus $423 million (70 cents) in 1Q2012. Adjusting for one-time items, the Tulsa operator earned $152 million (22 cents/share), compared with $236 million (39 cents). WPZ profits fell year/year to $456 million net from $551 million. The partnership's fee-based revenues were 5% higher at $684 million, but they fell 1% sequentially.

NGL margins fell not only on ethane rejection but because propane and butane prices "remained at depressed levels." Higher olefin margins, particularly higher ethylene margins at Geismar, helped mitigate the impact. Olefin margins increased 59% year/year and were 53% higher sequentially. Geismar ethylene volumes fell 13% year/year and 6% sequentially, but margins jumped 106% from 1Q2013 and were 61% higher than in the final period of 2012.

Tudor, Pickering, Holt & Co. (TPH) analysts Bradley Olsen and Joe Herman said the "biggest issue" facing Williams and WPZ "is big spending on Northeast infrastructure," which is increasing even as the fee-based earnings forecast falls.

There is good exposure to quality gas acreage in Susquehanna County, PA, noted the duo. However, there's "more risk" to dividend growth through 2015 because for the next two years Williams "will likely put more than $3 billion of new steel in the ground, excluding substantial spending at WPZ." Based on its project list, Williams-level spending alone may exceed "$5 billion in the next several years," and the $200 million IDR infusion for WPZ "may not solve "growing financing needs."

Williams management for more than a year has envisioned building a 3 Bcf/d natural gas hub for the Northeast. Along with its formidable gas pipeline takeaway capacity, it operates the former Laser Gathering System in the Marcellus (see Shale Daily, Dec. 5, 2011). Last year it acquired Caiman Energy's midstream business for the Utica and Marcellus shales (see Shale Daily, March 20, 2012).

Joint ventures (JV) also are a big part of the growth plans. The Constitution Pipeline in Susquehanna County, PA, is being built with Cabot Oil & Gas Corp. (see Shale Daily, Jan. 22). Blue Racer, a JV with Dominion, would expand Utica midstream services (see Shale Daily, Dec. 24, 2012; Jan. 31, 2012). The Bluegrass Pipeline JV with Boardwalk Pipeline Partners LP would carry mixed NGLs to Gulf Coast and Northeast markets (see Shale Daily, March 7). Last month Williams launched an alliance with a unit of Royal Dutch Shell plc for Three Rivers Midstream to invest in NGL and dry gas handling infrastructure in northwestern Pennsylvania and northeastern Ohio (see Shale Daily, April 15).

"WMB's future lies in the Northeast," said the TPH analysts, "and there's logic" to its diversified investments. However, with capital spending higher over the past year and "operational complaints" emerging by exploration and production companies (E&P) during 1Q2013 conference calls, "we believe that the 'Marcellus/Utica or bust' strategy being pursued is higher-risk than many investors believe.

"The risk to midstream operators in this new market is highlighted by Bluegrass: with rich gas rig count falling and E&Ps expressing interest in diversifying away from Northeast NGL markets, WMB proposed the Bluegrass pipeline, which we believe is competitive with WPZ's plans to build more than 100,000 b/d of fractionation capacity in the area. Bluegrass would allow customers to ship to lower-cost Gulf Coast fractionators, avoiding the risk of being long purity products in a seasonal and illiquid Northeast market.

"Meanwhile, difficulties in the midstream operating environment in densely populated areas have been highlighted by a slew of recent issues that go beyond WPZ's capex inflation," that include "persistent problems" with Laser pipeline compressors, delays in Utica processing by MarkWest units, delays to Dominion's Natrium plant and delays to the Access Kensington plant in the Utica.

"We're left with a question: if incremental investment in the Northeast was not offering attractive risk-adjusted returns, especially in Caiman assets, would we see a change in strategy?"

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