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Williams Cuts Drilling, Readies Midstream Opportunities in Marcellus

Williams has cut its natural gas-weighted drilling plans for 2009 by more than half, but midstream opportunities are beckoning in the Marcellus Shale, the CEO said Thursday.

The company, which has concentrated its exploration efforts in the Rocky Mountains, reported U.S. output in 1Q2009 jumped 21% year/year. However, a 60% cut to its drilling plans, which includes laying down 20 rigs, should result in full-year output growing only 2-4%, CEO Steve Malcolm told financial analysts during a conference call.

The Tulsa-based company reported a net loss of $172 million (minus 30 cents/share) in 1Q2009, compared with net income of $500 million (84 cents) in the year-ago period. Profits in the first three months of 2009 mostly were impacted by one-time charges of $241 million related to Venezuela investments. However, Williams also disclosed that it lost $34 million associated with early termination of rig contracts.

"The story obviously is low energy prices and significant nonrecurring items," Malcolm said. "For the full year, we see a slight improvement in crude, but continued downward pressure on natgas prices, and some improvement in NGL [natural gas liquids] margins. The dip in profits is largely from E&P [exploration and production]. The drivers have changed because of lower natgas prices...and higher debt costs."

Williams' "integrated business model," which includes a mix of gas pipelines, midstream and E&P, will get the company through the current storms, he said.

In the Rocky Mountains, where most of Williams' E&P has been focused, the company now is operating only eight rigs -- down from 28 at the end of last year. Williams also has only two rigs running in the Barnett Shale, with two more in the San Juan Basin.

The company's well costs are down 15-20% year/year, and lease and other operating expenses are "trending downwards." However, the strain of lower gas and oil prices prompted the company to cut its drilling plans by 60% this year.

Williams in mid-February said it expected New York Mercantile Exchange (Nymex) gas prices to average $4.50-6.00/Mcf this year. At that time it also set average Rockies prices at $3.00-4.50, and average San Juan/Midcontinent prices at $3.75-5.00. Based on its latest assumptions, Williams revised its 2009 pricing assumptions lower and now is forecasting Nymex gas to average $4.00-5.00/Mcf; Rockies gas $2.50-3.50; and San Juan/Midcontinent gas to be $2.75-3.75.

Even though most of Williams' domestic production is from the Rockies, 79% of the output is not at current Rockies prices because of hedging and from transporting or producing some output at other price points, noted Malcolm. Williams' total production in 1Q2009 was 1.23 Bcfe/d.

To expand its portfolio and to prepare for where it sees production growing in time, Williams has begun to form partnerships in the Marcellus Shale. In early April the company formed a midstream joint venture (JV) with Atlas Pipeline Partners LP to gain a 51% stake in Atlas' existing Appalachian Basin gathering system (see Daily GPI, April 2). The partnership will be the start of something much bigger, Malcolm told analysts.

"We've talked about the fact that our midstream strategy is to create large-scale positions where we can exercise some market power," he said. "That's certainly been the case with all the basins we've moved into. That is our game plan with the Marcellus. Many producers have said that the midstream challenges in the Marcellus were daunting, and we've had several calls already from producers asking for help. We're very excited, and we expect to be able to create the same kind of system there that we've created in other kinds of basins."

To accommodate the JV, Williams raised its capital spending for 2009 by $100 million to $2.25-2.55 billion.

"The majority of the business in the Marcellus is fee-based," said midstream chief Alan Armstrong. "We will be somewhat exposed to gas prices there, which is a nice offset to the midstream business, so there will be a mix. There is a need for infrastructure. There are a lot of pipelines that crisscross the Marcellus, but the degree of volumes is building very rapidly out of the area, which has caused a need for systems for producers to get the very best prices. There is a good opportunity for large-scale infrastructure up there, and we're excited to be talking to a lot of interested producers...There's a whole lot of interest."

Malcolm said Williams has a "pretty good idea of what it will take to keep up with Atlas' production. And Atlas is a very important customer. But let me say that it is not the limit of our desire..."

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