Lower natural gas prices led Williams Cos. to drop rigs and delay completions in some of its key U.S. onshore basins in the first three months of the year, but by December, total volumes should be 7-10% higher than they were in 1Q2010, executives said Wednesday.

CEO Steve Malcolm and his management team talked about Williams' earnings and production during a conference call with financial analysts. Ralph Hill, president of the exploration and production unit, explained how gas volumes have fallen, but he thinks they will increase over the coming months in the anchor play, the Piceance Basin, where development is under way in the Piceance Valley and Piceance Highlands.

"We did drop last year from 28 rigs in the Piceance down to about as low as seven," Hill said. "We're currently at about eight in the Valley and two in the Highlands, and we'll have -- we'll add a few rigs in both of those areas over the course of the year.

"We also deferred about 70 completions in the Valley, and those things are starting to be completed now. We've got a...couple more rigs running, so we do expect and we have seen our volumes are starting to turn back to where we'll be, essentially for the year, flat with 2009 volumes...We're right on plan, right where we thought we'd be, and the volumes are starting to turn back around a little bit."

Williams also has expanded its exploration and midstream focus, buying up acreage in the Marcellus Shale. It now has around 45,000 acres in the play, a leasehold that is expected to grow, Hill said.

"I think a meaningful position would be about double that at some point," he said. "Again, we'll be disciplined. But we see good opportunities."

Williams, which has a solid position in midstream markets, isn't buying into the move by other gas-weighted producers to begin exploring in new areas to gain a bigger oil or natural gas liquids (NGL) position, as some, including Chesapeake Energy Corp., have done (see related story).

Alan Armstrong, who helms Williams midstream gathering and processing business, noted that "NGL margins are very beneficial to producers today and adding a lot of value.

"But I would certainly say in the case where they're going into new exploration areas, like Chesapeake announced, that that's a long ways away from actually producing NGLs into the market. And a lot of things will change over time by the time those NGLs get into the market."

Armstrong pointed out that new oil production and NGLs will take more infrastructure. "The Marcellus [shale] is a great example of that, where there's a lot of rich gas, but we're a long ways away from having the infrastructure available to get those NGLs into the market. And so I think over time, I think if we continue to see high margins, we should continue to see NGL supplies increase."

In 1Q2010 Piceance Basin production fell 11% to 632 MMcfe/d from 710 MMcfe/d in the year-ago period. Powder River Basin output was down 10% from a year earlier to 238 MMcfe/d from 265 MMcfe/d. In its "other" basins, which includes a new entry into the Marcellus Shale, output fell 7% in the period to 232 MMcfe/d from 250 MMcfe/d.

Because of a restructuring move that transformed Williams Partner LP into a diversified master limited partnership (MLP) (see Daily GPI, Jan. 20), Williams reported a net loss for the first three months of the year.

Williams lost $193 million net (minus 33 cents/share), compared with a net loss of $172 million (minus 29 cents) in 1Q2009. The one-time charges associated with creating the MLP totaled around $401 million after taxes. In the year-ago period, Williams took a significant loss associated with discontinuing its operations in Venezuela.

Williams Partners, whose business includes natural gas transportation, gathering, treating, processing and storage; NGL fractionation; and oil transportation, reported a profit of $414 million in the first three months, compared with $252 million a year earlier.

The Exploration & Production unit also reported a profit, which hit $162 million in 1Q2010 compared with $76 million in 1Q2009. In the first three months of 2010, Williams' net realized average price for U.S. production was $5.01/Mcfe, which was 19% higher than the $4.21/Mcfe realized a year earlier.

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