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Williams Pondering Another Transformation

Williams might reconfigure its business to boost shareholder value and could announce a decision in the first quarter, the company said last Thursday. Among potential changes is the separation of one or more main business units. Meanwhile, exploration and production (E&P) drove robust improvement in the third quarter.

Macroeconomic environment, credit markets and energy prices, among other things, will be considered in the evaluation, which could result in no change being made, Williams said. Beyond that, executives had little to offer about potential changes during a third quarter earnings conference call.

Williams third quarter net income was $366 million, 62 cents/share, compared with $198 million, 33 cents/share, in the year-ago period. The E&P business was the driver of the increase with key factors being higher net realized average natural gas prices and strong gas production growth. On an adjusted basis, income was $332 million, 57 cents/share, compared with $239 million, 39 cents/share, in the year-ago period.

Increased development within the Piceance, Powder River and Fort Worth basins drove 18% growth in domestic production volumes, the company said. In the Piceance Basin of western Colorado -- the company's cornerstone for production and reserves growth -- average daily production increased 15% for the third quarter. In the Powder River Basin in Wyoming -- the company's second-largest production area -- average daily production increased 37% for the quarter. Third quarter net realized average price for U.S. production was $6.97/Mcfe, which was 52% more than the $4.59/Mcfe realized in third-quarter 2007.

"While Williams' operating results and liquidity continue to be strong and we've created significant value for shareholders, including a 128% three-year return through 2007, the market is not recognizing the value of the company," said CEO Steve Malcolm. "We believe we can do more to deliver value in the future. Williams has a century-long history of successfully reshaping and reinventing itself to create the most value."

At the beginning of the conference call, Malcolm tried to warn off questions about the potential reorganization by cautioning that answers weren't available. Try as they might, call participants were unable to pry out any further details, or even if they exist at this point. However, in comments Malcolm recounted the recent history of Williams while building the case for another possible metamorphosis to come.

"I think you've seen Williams on many occasions during our long history successfully reshape and reinvent the company in ways that create the most value," he said. "And in the last few years we've pulled a variety of levers to accelerate value creation, and I'm speaking here about the formation of two publicly traded MLPs [master limited partnerships]...We divested our power business (see NGI, Nov. 12, 2007) and completed a billion-dollar stock repurchase program...

"We have embraced the integrated model, and I think that we've performed very well. In the three years ending 2007 we delivered 128% total shareholder return. We've talked to you about the merits of that integrated model. We've talked about the fact that stable and steady cash flows from gas pipe form the foundation of our credit. Gas pipe throws off cash for investment in higher-return projects. We talked about [the] midstream [business] as being a wonderful internal hedge to our E&P operations. And we've talked about how the integrated model creates real and significant growth opportunities.

"So we entered 2008 with great optimism. We had just sold power and moved into a very strong commodity price environment and began to under perform many of the pure-plays. A lot of people kept saying, 'What's the catalyst around Williams?' And, of course, I always thought that our continued strong financial performance should be enough. Then we moved into a down commodity market as we've seen here most recently. I thought that there would perhaps be some gravitation toward safety and the safety that Williams offered by virtue of its integrated model. We have not seen that occur. And so we believe that we can do more to deliver value to shareholders in the future."

In the near term, uncertainty at Williams is giving Moody's Investors Service pause. Moody's placed a negative outlook on the ratings for Williams and each of its rated subsidiaries. "The negative outlook reflects the uncertainty of which businesses will be retained by Williams and what its ultimate capital structure will be," said Pete Speer, a Moody's vice president. "While management has stated that its intention is to retain an investment-grade rating, there is risk that the final course of action chosen could result in a ratings downgrade."

Similar to other energy patch players announcing third quarter earnings, Williams executives detailed capital spending reductions and emphasized the company's balance sheet strength in a recessionary environment with softening energy commodity prices.

"Williams achieved another quarter of strong earnings growth, highlighted by an 18% increase in natural gas production," Malcolm said. "We now face a much more challenging environment, as the global financial crisis and economic recession have driven energy prices much lower. While we have changed our earnings and capital spending outlook in light of current conditions, Williams' strong liquidity and balance sheet provide us with firm footing and the flexibility to perform in a difficult market."

For 2008 the company lowered its consolidated segment profit guidance to a range of $2.9 billion to $3.15 billion and earnings per share of $2.10 to $2.30. The previous ranges were $3.15 billion to $3.65 billion and $2.35 to $2.80. The update reflects lower gas prices and natural gas liquids margins, as well as the effect of two hurricanes in the Gulf of Mexico. For 2009 Williams lowered guidance to a range of $1.95 billion to $2.9 billion and earnings per share of $1.25 to $2.05. Previous ranges were $2.925 billion to $3.825 billion and earnings per share of $2.10 to $2.95. The update reflects lower expected gas prices, lower expected NGL margins and a slower than expected gas production growth, reflecting lower expected capital spending in E&P.

Williams lowered capital expenditure guidance for 2008 to $3.375 billion to $3.575 billion. The previous range was $3.3 billion to $3.85 billion, inclusive of potential future projects. And for 2009 the company lowered its guidance to $2.8 billion to $3.1 billion. The previous range was $2.925 billion to $3.625 billion, inclusive of potential future projects. The reduction is primarily based the expectation for lower spending in E&P and the midstream business based on lower energy prices, a slower economy and difficult financial markets.

As of Oct. 31, total liquidity was about $3.5 billion, which included approximately $1.8 billion in cash and cash equivalents and $2.4 billion in unused revolving credit facilities from a group of 19 banks. The cash and cash equivalents balance includes approximately $600 million being utilized by international operations and certain subsidiaries, with the remainder composed primarily of government-backed securities. The company does not have any significant debt maturities until June 2011.

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