Tulsa-based Williams, which presides over one of the largest natural gas systems in the United States, onshore and in the Gulf of Mexico, is streamlining operations and has begun a “voluntary separation program” as Northeast producers pull the reins on development.
CEO Alan Armstrong during the quarterly conference call told investors, “we still believe in the strong natural gas demand growth fundamentals that underpin our strategy,” but there have been delays in the startup of “nearly all” of the Lower 48 liquefied natural gas (LNG) export terminals that were scheduled to come online in the first half of 2019.
“That just means we're going to see an even stronger pool of natural gas in the back half of this year. It really is easy to see that the natural gas demand growth outlook remains very strong, driven by LNG export growth continued, power generation and major industrial investments…” because of low natural gas and natural gas liquids prices.
“Confidence in low-cost U.S. natural gas reserves will continue to drive strong natural gas demand growth over the long term,” he said. “And as a result, we believe that there will have to be a call on natural gas-focused supply areas given the continuous growth in natural gas demand and the stronger-than-ever capital disciplined being demonstrated by the producer community.”
In the near-term, however, “we continue to see commodity price headwinds for our producer customers” in the Northeast, served by Transcontinental Gas Pipe Line Co., aka Transco, and “producers are responding appropriately to the current market conditions.”
Continuing to plan around “or hope for” higher gas prices “would only exacerbate the linked-in supply, and we are also very focused on closely matching our capital programs with these latest forecast.”
Williams now expects growth capital for 2020 in the Northeast segment “ends up being about half of what it was in 2019” Armstrong said. Management also is making “significant near-term reductions in '19 as we continue to respond to the producers’ disciplined approach.”
Based on the most recent producer customer feedback, Williams now expects the Northeast Gathering & Processing (G&P) volume growth of about 13% in 2019.
COO Micheal Dunn said Williams conducts a detailed analysis with each of its producers in the Northeast and meets with some on a weekly basis to plan projects and activities around when wells would be connected and future expansion opportunities.
“We have a very robust planning process with nearly every one of our producers up there
and that's what we desire with every one of them and we strive for,” Dunn said. “So we do a lot of work with them in order to make sure that we're not getting out in front of them, but we're also meeting their needs…
“We worked really hard to scale back a lot of our capital investment immediately with the producers when they told us that they were scaling back some of their turn in lines for their wells, so we were able to very quickly take a lot of capital out of our Northeast investments that we had planned for. Therefore we're heading toward the lower end of our growth capital guidance just because of that activity downturn.”
Year-to-date, Williams has generated about 16% gathering volume growth, “but we do expect that overall annual growth to moderate in the fourth quarter, mostly just because our fourth quarter comparison will be up against volumes that grew rapidly after Atlantic Sunrise came on in the fourth quarter of '18,” Armstrong said.
The 2020 forecast for now shows “about a 5.5% gathering volume growth over 2019...We had always expected a slowing in the growth rate for 2020 versus '19,” with a compound annual growth rate of around 10-15%. “Beyond 2020, we do see an opportunity for a stronger growth rate to resume in 2021, but that of course will be dependent on a better balance in the natural gas market.”
Even in today’s pricing environment, “producer netbacks are still better than they were in the '15 and '16 timeframe when production was constrained and commodity prices were more a function of the basis differential…”
The Northeast G&P business “can continue to generate even in the weak natural gas price environment we're currently experiencing, and we remain very focused on cost reduction and capital discipline as we await long-term fundamentals to balance.”
The company is reducing its operating areas to two, with one focused primarily on the FERC-regulated gas pipeline business and the other on the nonregulated business.
“The reorganization to two operating areas represents another step toward becoming further simplified and centralized as we seek to the very best operator in the natural gas infrastructure
Business,” Armstrong said. “These moves are basically taking advantage of the scale that we have in these very similar businesses and continuing to drive common processes income systems across our operations.”
Beyond consolidating the operating areas, a voluntary separation program has begun. Few details were provided on how much the company could shrink. Williams also is considering other “cost reduction opportunities, given the $5 billion-plus of asset sales that we've had over the last three years,” Armstrong said.
“Really, narrowing our focus down to the natural gas infrastructure space is allowing us to take full advantage of the scale, and I can tell you the entire management team is very focused on having the very best operating margin ratio in the business.”
Overall, Williams gathering volumes climbed 11% during the second quarter from a year ago.
The Northeast segment during the second quarter saw improvement from increased gathering volumes in the Susquehanna Supply Hub and in the Utica Shale region, as well as from investments in the Marcellus South and Bradford gas gathering systems.
Growth in the Atlantic-Gulf operating segment during the quarter was driven by Transco expansions, including Atlantic Sunrise and Gulf Connector, which began service in early January.
In the West segment, service began in the quarter on the Fort Lupton III processing plant expansion of 200 MMcf/d to serve Colorado’s Denver-Julesburg (DJ) Basin operators.
Service “started up right around the end of the first quarter, and at the end of the second quarter that new train there has already filled up, so there’s great growth going on there in the DJ Basin,” Armstrong said.
Year-to-date, the Atlantic-Gulf operations are up 21%, while the Northeast segment is 2% higher. The West is down about 3%, a reflection of lower NGL margins “and the effect of severe winter weather this year…All in all, I’m very happy with our second quarter performance, which tracks well with our overall business plan from last fall, despite declines we’ve seen in natural gas and NGL pricing.”
Williams is not slowing its progress on expanding gas service in the Northeast either.
On Thursday Transco requested authorization from the FERC for the Leidy South Project to move Pennsylvania gas to markets along the Atlantic Seaboard by the 2021-2022 winter heating season. The certificate application reflects an expected capital cost of $531 million and a target in-service of Dec. 1, 2021.
Leidy South would expand Transco firm transportation capacity by 582,400 Dth/d from the Leidy Hub and Zick interconnect to points downstream in Transco’s Zone 5 and Zone 6 market areas.
Net income increased year/year to $310 million (26 cents/share) from $135 million (16 cents). Cash flow from operations climbed to $1.07 billion from $891 million. Total revenue fell slightly from a year ago to $2.04 billion from $2.09 billion.