When Williams Cos. purchased Barrett Resources Corp. and its legacy assets in the Piceance Basin of the Rocky Mountains in 2001, management probably did not realize how fortuitous a move it would be.

The deal was announced in May 2001, and at the time, it was a stunner: Williams managed to snatch up Barrett Resources for about $2.5 billion before an acquisitive Royal Dutch/Shell Group could get to the table (see Daily GPI, May 8, 2001). Industry observers were a bit surprised by the move. Williams was then better known as one of the largest domestic natural gas pipeline companies, with some exploration and production (E&P) assets supplying its mighty energy merchant arm.

Times have changed — and so has Williams. Just a few months after the Barrett Resources transaction was completed, Enron Corp. declared bankruptcy. A few months later, the energy merchant business was a shambles. Like its peers, Williams began selling off a lot of its profitable assets at a quick clip, cutting out its trading operations and significantly reducing its work force. Still, it held on to most of its Rockies assets. The decision has paid off handsomely, as CEO Steve Malcolm noted Thursday.

“E&P is now our primary growth and value driver,” Malcolm told financial analysts at the Lehman CEO Energy/Power Conference in New York City. He said the company’s growth will be driven by “sharply increased” E&P, driven primarily by the Piceance Basin.

Williams is clicking on nearly all cylinders, said Malcolm. While its E&P is a growth driver, the company’s gas pipelines anchor Williams credit. Williams’ Transco and Northwest pipes (100%-owned) and its 50%-owned Gulfstream gas pipelines total about 14,600 miles overall, with total annual throughput of 2,600 trillion Btu. The midstream operations, meanwhile, “provide a natural economic hedge to E&P’s natural gas exposure,” with 8,100 miles of gathering lines, nine processing plants and six gas treatment plants with inlet capacity to gather, process and treat 5.8 Bcf/d.

Another Williams’ business, the master limited partnership (MLP) Williams Partners Ltd., was launched in August 2005 and provides “low-cost capital” and an avenue for a “growing source of cash distributions…” Williams’ goal is to “drop down $1-1.5 billion in assets during the next six months.” Only its power unit is a negative on credit, said Malcolm. That business, which has struggled, has a 7,600 MW portfolio, including six tolling contracts and two owned facilities.

The picture overall, though, is tied to E&P. Growing reserves and production will be the key to Williams growth this year and through 2008.

Malcolm attributed the E&P division’s success to its unconventional gas production. Williams has about 3.4 Tcf total of proved, domestic gas reserves in the Piceance, San Juan, Powder River, Arkoma and Fort Worth basins — and thousands of acres are still being evaluated. The other basins are performing well, said Malcolm, but none are growing as quickly as those in the Rockies. Now drilling about 1,800 wells a year in the Rockies, Williams’ average daily domestic production was about 738 MMcfe/d in 2Q2006, up 20% (131 MMcfe/d) over the same period of 2005.

“We have a growing Piceance Basin footprint,” Malcolm told analysts. The company in the past year added 12,200 acres to its core Piceance Valley holdings, and in July, the company was approved to begin 10-acre well spacing. Production in the Piceance alone is up 104 MMcfe/d, or 34% from a year ago. It has 24 total rigs now operating in the Piceance Valley and the emerging Piceance Highlands, compared with 13 rigs in 2Q2005.

“The Piceance production growth has been impressive,” Malcolm said.

Also in the Rockies, Powder River production is up 26 MMcfe/d, or about 23% from 2005. “The Big George coals are driving the basin growth. It’s up 99% year-over-year, and June versus March volumes [2006] are up 25%.”

Williams’ story, said Malcolm, is the “U.S. natural gas story.” The growing E&P business created a “net long position” for the company, “which is offset by midstream gas use.” There are risks tied to the rise and fall of gas prices, but Williams is forecasting steady prices in the short-term.

“Our view is gas prices will be in the $5 to $10/Mcf range [long-term],” with a narrower internal range of $6.50 to $8.50. “In 2007 and 2008, we’re using the $7 gas price.”

With those figures in mind, “Our strategy is to continue to rapidly develop the gas resources,” said Malcolm. “We’re very excited about the next 12 to 24 months. We are focused on converting reserves to earnings as quickly as possible…We are clearly opportunity rich.”

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