The Williams Cos. last Wednesday said it signed agreements to operate 10 new rigs as part of its program to step up production in the gas-rich Piceance Basin in western Colorado.
The Tulsa-based energy company reported it has entered into contracts with Helmerich & Payne, a contract drilling company in Tulsa, for the operation of 10 new FlexRig4 drilling rigs, each for a term of three years, which clears the way for Williams to increase the pace of developing its natural gas reserves in the Piceance Basin.
At the end of 2004, Williams said its ownership in the Piceance Basin accounted for 61% of the company's 3 trillion cubic feet equivalent (Tcfe) of total proved domestic reserves and more than half of its estimated 7 Tcfe of proved, probable and possible reserves.
The company noted it expects to drill approximately 300 wells in the Piceance Basin this year. The first appreciable increase in drilling activity from the new rigs is planned for 2006 when Williams plans to drill up to 450 wells in the basin, up from its previous plan for approximately 325 wells there, it said.
Williams also announced that it is increasing its planned capital spending in its Exploration & Production (E&P) segment by about $430 million over the three years from 2005 to 2007, with $400 million of the increase divided equally between 2006 and 2007. The company said it intends to fund the accelerated drilling program with current available excess cash and future free cash flows.
About three-quarters of the additional capital ($315 million) is planned for drilling, according to Williams. The remainder is targeted for expanding gathering and processing facilities to handle increases in the company's Piceance Basin production, it said.
Williams estimated that total capital spending for the E&P segment will be $530-605 million in 2005, $725-825 million in 2006, and $725-875 million in 2007.
As a result of the accelerated development plans, Williams last Wednesday raised its guidance for projected segment profit from its E&P business by $30 million to $480-555 million in 2006, and by $50 million to $550-675 million in 2007.
Williams currently has 13 rigs operating in the Piceance Basin through other vendors. As the new rigs from Helmerich & Payne are added, Williams said it is expecting to run an average of approximately 20 rigs in the basin in 2006 and an average of about 22 rigs there in 2007.
The new rigs are designed to drill up to 22 wells -- in an underground spoke formation -- from a single surface location that is half the size of traditional drilling sites. As a result, the company said much of its increased drilling activity will not be visible on the surface.
Williams said it has made arrangements to transport the additional gas production to market via a previously announced contract for up to 350 MMcf/d of capacity on a Wyoming Interstate Co. pipeline expansion that is scheduled to go into service in early 2006 and via other firm transportation commitments.
Merrill Lynch analyst Sam Brothwell called the announcement "clearly a positive development." He said it is "consistent with our view that [Williams] may face fewer drilling access issues than some of their peers in the northern Rockies."
Although Brothwell said he see "solid" earnings per share upside at Williams, he does not believe the gas market can sustain $7/MMBtu prices. He believes the Rockies, being a net exporter, is destined to be the marginal supply source for the country with its gas "furthest from the market and more costly to transport."
He also believes liquefied natural gas imports will pressure prices lower in the coming years. "We think that will pressure not only Henry Hub but basis as well. Basis will react just as it did with Canadian gas."
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