Sharply lower natural gas prices cut into Williams’ earnings in 2Q2009, but the losses were mitigated by reduced project costs and hedging practices, the company said Thursday.

Net income for the Tulsa-based producer was $142 million (24 cents/share) in 2Q2009, compared with $437 million (73 cents) in 2Q2008.

“This was a quarter in which our natural gas businesses performed as expected, as we were successful in reducing our operating and capital project costs and managing our liquidity,” said CEO Steve Malcolm “As a result, we remain on-target to meet our goals in a challenging year.”

Williams also continued “to take advantage of ideal growth opportunities, such as our entry into the Marcellus Shale earlier this year, and to execute on important expansion projects, such as our new Willow Creek processing facility in the Piceance Basin,” he said. “All of these efforts make Williams well-positioned for the coming market recovery that will drive substantial value across all of our businesses.”

Williams expanded into the Marcellus Shale this year through two joint ventures. Williams and Atlas Pipeline Partners LP created Laurel Mountain Midstream to own 1,800 miles of intrastate gathering lines in the Appalachian Basin to service 6,900 wells (see Daily GPI, June 3). Williams in June also agreed to jointly develop a gas leasehold in the shale with Rex Energy Corp. (see Daily GPI, June 23).

Williams’ exploration and production (E&P) business includes gas production in the Rockies, San Juan Basin, Barnett and the Marcellus shales, along with gas development in South America. The business reported a profit of $118 million in 2Q2009, compared with $496 million a year ago.

Average daily gas output from U.S. properties during 2Q2009 fell 4% sequentially from 1Q2009, but it rose 6% from a year ago to 1,180 MMcfe/d from 1,110 MMcfe/d. The biggest output gains were in the Piceance Basin, where Williams produced 703 MMcfe/d, 7% ahead of 659 MMcfe/d a year earlier. In the Powder River Basin output rose 3% to 242 MMcfe/d from 234 MMcfe/d. Williams “other basins” saw output grow 8% to 235 MMcfe/d from 217 MMcfe/d.

Net realized average prices for U.S. production were $3.95/Mcfe in 2Q2009, down 51% from the $8.06 realized in 2Q2008.

“Although natural gas production grew from second quarter 2008 to second quarter 2009, production is expected to continue to decline somewhat throughout the remainder of 2009 because of the company’s reduced drilling activity,” Williams said.

Williams midstream business reported profits of $137 million, compared with $270 million a year ago. The decline was attributed to lower natural gas liquid (NGL) and olefin prices, as well as lower NGL equity sales volumes, partially offset by lower production costs, the company said.

The pipeline segment, which primarily delivers gas to markets along the East Coast, to Florida and to the Pacific Northwest, reported net earnings of $162 million in 2Q2009, compared with $179 million in the year-ago period. The pipeline unit had higher operating costs in the period, which were partly offset by increased revenues from the Sentinel expansion, which went into service last December.

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