While many a Rocky Mountain region producer has bemoaned the basis blowouts of 2007, Williams has been able to turn the pipeline capacity constraint situation there to its advantage.
The company last week posted unaudited third-quarter 2007 net income that was 86% greater than the same period one year ago and credited strong gas production and gas liquids margins as well as new rates on two of its pipeline systems for the improvement. Net income in the third quarter was $198 million (33 cents/share) compared with a net income of $106.2 million (18 cents/share) for third-quarter 2006.
Williams benefited greatly in the third quarter from ongoing Rockies basis strife (see NGI, July 30) as its natural gas liquids (NGL) business was able to capitalize on low gas prices there.
"I think the quarter was driven, obviously, by strong NGL margins," CEO Steve Malcolm told analysts on a conference call Thursday. "We obviously took advantage of the Rockies basis anomaly, which created extraordinary processing profits for midstream. And our transportation and hedging strategy insulated E&P [exploration and production] from the challenges that many Rockies producers suffered and continue to suffer as a result of the basis blowout. This highlights the fact that we have stressed many times that we are a Rockies producer, not a Rockies price-taker, with just 7% of production exposed to Rockies prices."
Consolidated results include segment profit for Williams' businesses E&P, Midstream Gas & Liquids, Gas Pipeline and Gas Marketing Services as well as the "other" segment. For third-quarter 2007, Williams' businesses reported consolidated segment profit of $584.9 million, compared with $396.9 million for third-quarter 2006.
E&P reported third-quarter 2007 segment profit of $168.5 million, a 17% increase over the $144.5 million reported for the same period in 2006. Williams attributed the gain to strong growth in gas production and higher realized average gas prices, partially offset by higher operating expenses. For third-quarter 2007, combined average daily production from U.S. and international interests was up 17% to approximately 974 MMcfe, compared with 831 MMcfe for the same period in 2006. Daily production solely from interests in the United States was approximately 926 MMcfe in third-quarter 2007, up from 780 MMcfe in third-quarter 2006.
In the Piceance Basin of western Colorado -- the company's cornerstone for production and reserves growth -- third-quarter 2007 average daily net production was 570 MMcfe/d, a 33% increase over the third-quarter 2006 level of 430 MMcfe/d.
During the third quarter of 2007, Williams' U.S. production realized net average prices of $4.59/Mcfe, 7% higher than the $4.30/Mcfe realized in the same period a year ago.
While basin prices were lower in third-quarter 2007 compared to the same period a year ago, the company's firm transportation contracts, which allow a significant portion of its Rockies production to be sold at more advantageous market points, as well as fixed-priced hedges and collars, contributed to the increase in net realized prices. Net realized average prices include market prices, net of fuel and shrink and hedge positions, less gathering and transportation expenses. Williams lowered its 2007 segment profit guidance for E&P to $750 million to $825 million from $750 million to $950 million due to lower than planned basin gas prices in the third quarter and also lower than expected basin gas prices in the fourth quarter. Williams also is increasing its 2008 segment profit guidance for E&P to $1 billion to $1.3 billion from $950 million to $1.25 billion. Higher expected net realized prices and production volumes, partially offset by higher costs, are the factors driving the increase.
The Midstream segment reported third-quarter 2007 profit of $299.9 million, compared to $222.5 million in the third quarter of 2006, an increase of 35%. Williams credited record natural gas liquids (NGL) margins driven by low gas prices in the West and favorable commodity pricing on NGLs. Williams is once again increasing its segment profit guidance for Midstream for 2007 and 2008. For 2007, the company now expects $950 million to $1.125 billion in segment profit; previous 2007 guidance was $700 million to $850 million. For 2008, segment profit guidance is now $575 million to $850 million, up from previous guidance of $550 million to $825 million.
Also last week, Williams Partners LP and Williams signed a tentative agreement for the dropdown of the membership interest in the company that owns the Wamsutter gas gathering and processing system to the partnership, the companies said Thursday.
The nonbinding letter of intent specifies that Williams Partners would pay $750 million for the interest. The Wamsutter system includes the Echo Springs cryogenic processing plant and related gas gathering system near Wamsutter, WY. Wamsutter is a station on the landmark Rockies Express Pipeline (REX). The first 328-mile segment of REX, which runs from the Meeker Hub in Rio Blanco County, CO, to the Wamsutter Hub in Sweetwater County, WY, and to the Cheyenne Hub in Weld County, CO, is in service and has a current capacity of 500,000 Dth/d (see NGI, Oct. 29).
Once an approved definitive agreement is reached, the deal will be subject to standard closing conditions. The letter of intent provides for Williams Partners to receive cash flows from the existing Wamsutter business and share with Williams the increase in cash flows resulting from growth of the existing business. Williams will retain the right to make, and receive cash flows from, material expansion investments. Williams could then offer such expansion assets to the partnership, but Williams Partners would not be obligated to purchase any such expansion assets.
The Echo Springs plant has a processing capacity of nearly 400 MMcfe/d.
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