Energy infrastructure giant Williams’ first quarter profits were pummeled on sharply lower natural gas liquids (NGL) margins and related ethane rejection at its pipeline partnership.
Williams Partners LP, which holds most of the natural gas pipeline systems and midstream businesses, is expected to see lower NGL processing margins through 2014, in part because of higher assumed natural gas prices, and lower NGL prices and transportation volumes. Guidance in 2014 also included changes in assumed in-service dates for some projects.
NGL margins plunged 50% 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.
CEO Alan Armstrong lamented the “headwinds” the company and its still-profitable partnership are facing. However, “growth opportunities” are huge. “We expect that ongoing tremendous North American energy infrastructure needs will continue to combine with Williams’ unique capabilities to create a continuing robust set of investment opportunities.”
Williams operates or participates in almost 15,000 miles of interstate gas pipelines, including its nearly 70% stake in Williams Partners, as well as 1,000 miles of NGL pipes and more than 10,000 miles of oil and gas gathering lines. Facilities handle up to 6.6 Bcf/d of gas and more than 200,000 b/d of NGLs.
Williams and the pipeline partnership’s relentless focus on fee-based businesses will 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 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). Williams Partners profits fell year/year to $456 million net from $551 million. The partnership’s fee-based revenues were 5% higher than a year ago to $684 million, but they fell 1% sequentially from $694 million.
NGL margins fell, due not only ethane rejection but also because propane and butane prices “remained at depressed levels. Higher olefin margins, particularly higher ethylene margins at Geismar, helped mitigate the impact of the lower NGL margins and higher expenses.” Olefin margins increased 59% year/year and were 53% higher sequentially. Geismar ethylene volumes were off 13% year/year and 6% sequentially, but margins jumped 106% from 1Q2013 and were 61% higher than in the final period of 2012.
In addition to its pipeline partnership, Williams also operates Canadian-based Williams NGL & Petchem Services, and last year it acquired a half-stake in onshore midstream operator Access Midstream Partners LP (ACMP). The business segments together earned $487 million in 1Q2013, versus $650 million a year ago, brought down by declines in the partnership. Adjusted income from continuing operations was $152 million (22 cents/share), compared with $236 million (39 cents).
In conjunction with the lower guidance announced for Williams Partners, Williams agreed to waive incentive distribution rights for the unit of up to $200 million over the next four quarters. The support is expected to boost the partnership’s cash coverage to .90 times for 2013, giving it “short-term cash distribution support as a large platform of growth projects moves toward completion.”
New York Mercantile Exchange gas prices are forecast by Williams 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.
Tudor, Pickering, Holt & Co. (TPH) analysts Bradley Olsen and Joe Herman said the quarterly miss by Williams (WMB) and the partnership (WPZ) “felt like Groundhog day after a full year of weak reports…” The “biggest issue” is big spending on Northeast infrastructure,” which is increasing even as the fee-based earnings forecast falls.
The operator has good exposure to quality gas acreage in Susquehanna County, PA, and is the second biggest midstream player in the liquids-rich window of the Marcellus Shale, noted Olsen and Herman. However, there’s “more risk” to dividend growth through 2015. Through 2015 “WMB will likely put more than $3 billion of new steel in the ground, excluding substantial spending at WPZ.” Based on its projects on the drawing board, “we see WMB-level spending exceeding $5 billion in the next several years. We don’t think that WPZ’s problems are solved by $200 million infusion, so we are cautious” because of the “growing financing needs.”
In addition to some cash-heavy projects in the Gulf of Mexico, the company and pipeline system have a slate of big ticket items underway or planned in the Northeast; a 3 Bcf/d natural gas hub in the Marcellus Shale has been in the works for more than a year (see Daily GPI, Feb. 24, 2012).
Among other things, there’s a joint venture with Cabot Oil & Gas Corp. to build the Constitution Pipeline in Susquehanna County, PA, and they control the former Laser Gathering System in the Marcellus (see Daily GPI, Dec. 5, 2011). Caiman Energy’s midstream business was added to the mix last year to expand services in the Utica and Marcellus shales, and Blue Racer, a joint venture (JV) with Dominion, would provide more services (see Daily GPI, Dec. 24, 2012; March 21, 2012). A partnership with Boardwalk Pipeline Partners LP on Bluegrass Pipeline is to carry mixed NGLs to Gulf Coast and Northeast markets, and last month the Three Rivers Midstream alliance was formed with a unit of Royal Dutch Shell plc to invest in NGL and dry gas handling infrastructure in northwestern Pennsylvania and northeastern Ohio (see Shale Daily, April 15).
“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 risk to midstream operators in this new market is highlighted by Bluegrass: with rich gas rig count falling and E&Ps expressing interest in diversifying away from Northeast NGL markets, WMB proposed the Bluegrass pipeline, which we believe is competitive with WPZ’s plans to build more than 100,000 b/d of fractionation capacity in the area. Bluegrass would allow customers to ship to lower-cost Gulf Coast fractionators, avoiding the risk of being long purity products in a seasonal and illiquid Northeast market.
“Meanwhile, 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: persistent problems with Laser pipeline compressors, delays of MarkWest’s Utica processing, delays to Dominion’s Natrium plant (owned by Blue Racer JV), delays to ACMP’s Kensington plant in the Utica. We’re left with a question: if incremental investment in the Northeast was not offering attractive risk-adjusted returns, especially in Caiman assets, would we see a change in strategy?”
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