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Williams to Pursue 'Value-Creating Projects,' Says CEO

Williams Cos. Inc. and its subsidiaries combined to lift 4Q2009 profits 50% from a year earlier, and with its pipeline partnership transaction now complete, the Tulsa-based producer is looking for new exploration and midstream opportunities, CEO Steve Malcolm said Thursday.

Net income in the final quarter reached $172 million (29 cents/share), well above $115 million (20 cents) earned in 4Q2008. However, reduced natural gas drilling activity led to results falling short of Wall Street's estimates. Minus one-time charges, earnings fell 16% from a year ago to 27 cents/share, which was well below a Wall Street consensus of 34 cents. However, 4Q2009 revenue of $2.3 billion was 11.6% higher than in 4Q2008.

The recent completion of a plan to merge nearly all of its interstate natural gas pipeline and midstream affiliates into Williams Partners LP (see NGI, Jan. 25) will help the company build its operations in North American shale gas plays, Malcolm told financial analysts during a conference call.

"With our transformational asset contributions to Williams Partners complete, we are poised to pursue a greater number of value-creating growth projects throughout our businesses," he said. "One of the opportunities we are seizing is a midstream expansion in the Marcellus Shale. Williams Partners will fund the construction of a natural gas gathering pipeline to support a long-term agreement with Cabot Oil & Gas, one of the key producers in the area" (see NGI, Jan. 11).

The agreement with Cabot calls for Williams to build a 28-mile 20-inch diameter gas pipeline to carry 350 MMcf/d from a central delivery point in Susquehanna County, PA, to Transcontinental Gas Pipe Line (Transco) in Luzerne County, PA. The pipe, which could be expanded, is expected be placed into service in 2011.

Growing Williams' businesses "will benefit our shareholders and also add to our domestic natural gas infrastructure," Malcolm said. "We believe strongly that natural gas is a very important part of our energy future. It's an abundant, job-creating, cleaner domestic energy source. It also will help make renewable energy sources, such as wind and solar, viable long-term options."

However, Williams outlook for gas prices remains unclear, and that casts some uncertainty over the company's drilling plans this year, Malcolm acknowledged.

"There continues to be a great deal of uncertainty with respect to where prices are headed," he told analysts. "We have been delighted by the winter. We have been delighted by the fact that storage inventories have been pulled down. But there remains uncertainty. I think people are trying to figure out the EIA [Energy Information Administration] supply data, trying to understand to what extent we have seen deliverability reductions. But...if we get through the heating season and futures prices continue to be strong, particularly strong to the point where we are still able to capture the kinds of well economics that are shown for a typical Piceance Valley well, I think that under those circumstances we would want to accelerate our drilling activities in the Piceance."

With gas prices on the futures strip at around $6.12/MMBtu, an analyst asked whether the lower-cost wells in the Piceance Basin of Colorado -- the company's core focus -- would lead Williams to expand its gas drilling there "if you're still north of $6 after the withdrawal season." Malcolm said, "I think the short answer is 'yes.' If we're still looking at futures prices north of $6 given the kinds of returns that we are seeing in the [Piceance] valley, I think that we would want to accelerate our activities."

Ralph Hill, who anchors the company's exploration and production (E&P) business, said the Piceance has a lot of potential. "We already are moving from about 12 rigs in the entire Piceance complex area in 2010. The plan in 2011 is to go to 22, and we have the opportunity do more."

In the E&P unit, total output in the final three months of 2009 rose about 2% year/year (y/y) to 1.23 Bcfe/d. Domestic volumes increased 1.8% to 1.18 Bcfe/d, driven by strong contribution from the Piceance, Powder River and other basins. Strong domestic production growth helped the E&P segment to achieve operating profit of $115 million, compared with a segment loss of $27 million in 4Q2008. Williams average realized natural gas price climbed 2.5% to $4.50/Mcfe.

The Midstream segment saw its operating profits more than double y/y to $269 million, primarily because of higher natural gas liquid (NGL) and olefin prices and production. New volumes the deepwater Gulf of Mexico Tahiti expansion and higher fee-based revenues also led to the gains. Total equity NGL sales volumes were up almost 10.2% y/y to 314 million gallons, mostly on the absence of hurricane-related unfavorable impacts in the Gulf region that had slammed results in the year-ago period.

Williams Gas Pipeline segment also saw its operating profits up 7.6% from 4Q2008, which the company attributed to higher transportation revenues partially offset by costs.

The company and its subsidiaries ended 2008 with 12.6 Tcf of domestic proved, probable and possible (3P) reserves by over the course of one year, the companies "have now grown that 14% to 14.4 Tcf of domestic 3P reserves," said Malcolm.

Under the revised Securities and Exchange Commission (SEC) proved reserves rules, which resulted in a 12-month average price for the year instead of the year-end price for gas, Williams had 336 Bcf of price-related revisions, he said. The rules also required Williams to reclassify 496 Bcf from "proved" back to "probable."

However, "on the plus side, the new SEC rules for the first time allow us to count undrilled locations that are more than one offset away from a producing well as proved where we have reasonable certainty of production," the CEO noted. "This allowed us to add 454 Bcf...We also added a net 570 Bcf of proved reserves through the drillbit, making our net proved reserves at the $3 price, 4.255 Bcf."

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