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Williams Reviews Units in Uncertain Time, Hunkers Down

With fourth quarter profits hit hard last year by the recession, Tulsa-based Williams' CEO told financial analysts last Thursday on an earnings conference call that the company was forced to look at possibly restructuring its three major business lines -- exploration and production (E&P), midstream and natural gas pipeline units -- but has decided to stay the course and reduce its capital expenditures this year to position itself to seize on opportunities when the economy improves.

CEO Steve Malcolm described the current situation as a "very, very challenging economy with a very weak energy market."

Nevertheless, Williams will be looking for ways to "expand its footprint" in the E&P and midstream sectors, said Malcolm.

The company's earnings report included increased overall profits for 2008, with a sharp drop-off in the fourth quarter. Net income for 2008 was $1.418 billion, or $2.40/share, compared with $990 million, or $1.63/share, for the previous full year; for the fourth-quarter, net income was $115 million, or 20 cents/share, compared with $225 million, or 37 cents/share, in the same period in 2007.

Despite a $24 million hit from Hurricane Ike, Williams interstate natural gas transmission pipeline and storage operations reported $50 million more in revenues and is expecting up to $1 billion in segment profits in 2009, according to Gas Pipeline President Phil Wright.

Calling the 2008 results "very strong" and pledging to continue to protect Williams' advantages in the Rockies, Malcolm acknowledged that the "business landscape" has changed dramatically since the company's November earnings conference call, particularly with the nosedive in energy commodity prices.

"Credit markets remain very difficult and unreliable," he said. "We're taking appropriate steps to reduce our capital spending, and are limiting the expenditures to $1.3 billion below our 2008 level, about 36% lower than last year. The good news is the current cash and credit facilities are adequate to fund the 2009 capital expenditures, and by 2010 we expect to fund cash from operations entirely."

With credit market and commodity price shrinkage, Williams has reexamined it entire structure, "recalculated its expectations" for 2009 earnings and operations, adopting a more defensive posture for positioning the company to take advantage of its operations in low-cost, high-return basins when the market turns around next year or 2011, said Malcolm. He and other senior executives referred to a "strategic offense" approach to the company's business in the coming months and years.

Three different analysts pressed Malcolm to define what he meant by the offensive strategy?

"All we are saying in the case of the paradox [bad times with lots of cash] is that we are seeking to expand our footprint, both from an E&P and midstream perspective, so what we are trying to convey is that this isn't only about playing defense," Malcolm said. "We are able to make investments that expand our footprint. We'll continue to look at strategic opportunities that make sense, but don't in anyway conclude [now] that we have something in mind and are about ready to announce something."

Williams E&P President Ralph Hill offered the example of recently completed drilling (four vertical and five horizontal wells) and the fact that he plans to double the number of horizontal wells the company drills (from seven to 14) this year. "So those are some areas where we are playing offense, and there are some other land opportunities that we have out there in the budget to continue to expand in various areas," Hill said.

Hill agreed with an analyst's off-the-cuff calculation that if Williams essentially curtailed all of its drilling because of the low commodity prices, its E&P activity for all of 2009 could drop by 15-20%.

In response to a question about the prospects for liquefied natural gas (LNG) imports impacting the U.S. domestic gas businesses, Malcolm said there was essentially too much uncertainty now to accurately predict if there will be any near-term impact.

"The answer is somewhat uncertain," he said. "Certainly, demand in Asia and Europe for LNG is somewhat diminished. it would appear. Whether the excess supplies find their way to the United States is somewhat questionable, and I guess I really don't have a crisp answer today."

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