Energy infrastructure giant Williams, whose pipeline partnership holds a bundle of huge natural gas and liquids operations, expects to see “full ethane rejection” through 2015, which will lead to “near-term headwinds” for the unit, CEO Alan Armstrong said last week.
The operator, which owns about 70% of Williams Pipeline Partners LP (WPZ), cut the unit’s distributable cash flow (DCF) guidance for both 2013 and 2014 by $125 million and is waiving up to $200 million in incentive distribution rights. The waiver, which should provide “short-term cash distribution support as a large platform of growth projects moves toward completion,” is driven by “historically low” NGL prices and higher natural gas prices, both of which will impact guidance in 2013 and 2014, Armstrong said during a conference call.
NGL margins fell by half year/year and dropped 21% from 4Q2012. Ethane equity sales in turn spiraled 87% lower to 23 million gallons from 176 million gallons in 1Q2012; they also were down 84% sequentially. The partnership earned 4 cents/gallon per unit of ethane NGL margins, 89% below the 36 cents earned a year ago and flat from 4Q2012.
Armstrong lamented the near-term earnings shortfall that the operations are facing. The operator in February had provided fair warning, suggesting then that WPZ’s growth projections would be revised after 2012’s lower-than-expected performance (see NGI, Feb. 25). However, growth opportunities are “huge” and “we expect that ongoing tremendous North American energy infrastructure needs will continue… to create a continuing robust set of investment opportunities.”
A relentless focus on fee-based businesses should help to alleviate NGL issues over the next two years, Armstrong said. “The recent run-up in natural gas prices reduces the margin in the commodity-based portion of our businesses. Longer term, we think this higher price will drive greater volumes as producers respond to these more reasonable prices.”
Williams now expects New York Mercantile Exchange gas prices to average $4.06/MMBtu in 2013, climbing to $4.25 in 2014 and 2015. West Texas Intermediate crude oil is priced at 91 cents/bbl in 2013, then is set at 90 cents for the following two years. Assumed 2013 ethane prices are 28 cents/gallon on average, with prices 2 cents higher in 2014 and 2015. Propane is expected to be about 96 cents/gallon this year, then average $1.15 for the following two years.
Williams earned $161 million net (23 cents/share) in 1Q2013, versus $423 million (70 cents) in 1Q2012. Adjusting for one-time items, the Tulsa operator earned $152 million (22 cents/share), compared with $236 million (39 cents). WPZ profits fell year/year to $456 million net from $551 million. The partnership’s fee-based revenues were 5% higher at $684 million, but they fell 1% sequentially.
Tudor, Pickering, Holt & Co. (TPH) analysts Bradley Olsen and Joe Herman said the “biggest issue” facing Williams and WPZ “is big spending on Northeast infrastructure,” which is increasing even as the fee-based earnings forecast falls. There’s “more risk” to dividend growth through 2015 because Williams “will likely put more than $3 billion of new steel in the ground, excluding substantial spending at WPZ.”
Williams management for more than a year has envisioned building a 3 Bcf/d natural gas hub for the Northeast. Along with its formidable gas pipeline takeaway capacity, it operates the former Laser Gathering System in the Marcellus. Last year it acquired Caiman Energy’s midstream business for the Utica and Marcellus shales. Joint ventures (JV) also are a big part of the growth plans, including the Constitution Pipeline in Susquehanna County, PA; Blue Racer, a JV with Dominion to expand Utica midstream services; and the Bluegrass Pipeline JV with Boardwalk Pipeline Partners LP to carry mixed NGLs. Last month Williams also allied with a unit of Royal Dutch Shell plc for Three Rivers Midstream to invest in NGL and dry gas handling infrastructure in Pennsylvania and Ohio.
“WMB’s future lies in the Northeast,” said the TPH analysts, “and there’s logic” to its diversified investments. However, with capital spending higher over the past year and “operational complaints” emerging by exploration and production companies (E&P) during 1Q2013 conference calls, “we believe that the ‘Marcellus/Utica or bust’ strategy being pursued is higher-risk than many investors believe.
The “difficulties in the midstream operating environment in densely populated areas have been highlighted by a slew of recent issues that go beyond WPZ’s capex inflation,” including “persistent problems” with pipeline compressors and delays in Utica processing. “We’re left with a question: if incremental investment in the Northeast was not offering attractive risk-adjusted returns…would we see a change in strategy?”
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