Williams CEO Alan Armstrong said Tuesday the company continues to “evaluate all options” in an attempt to merge with Southern Union Co., but he declined to offer additional details.
Southern Union in July agreed to Energy Transfer Equity LP’s $5.7 billion cash-and-stock offer, which topped Williams’ last bid of $5.6 billion (see Daily GPI, Aug. 8; July 20). ETE launched its bid for Southern Union in June and has been vying with Williams since then to create the largest natural gas pipeline franchise in the United States.
Armstrong, who led a conference call with financial analysts to discuss the company’s second quarter performance, said he couldn’t discuss whether a higher bid from Williams was forthcoming, saying he wanted to “stick to a strict script” focused on quarterly earnings. However, when asked whether a higher bid possibly was forthcoming, he answered, “We’ll certainly be a disciplined buyer.”
Williams quarterly earnings jumped 23% to $227 million (38 cents/share) from $185 million (31 cents) a year ago. Excluding charges from restructuring pipeline partnership Williams Partners LP, continuing operations earnings climbed to 39 cents/share from 28 cents.
The company is “ready to go” with an initial public offering (IPO) of its exploration and production (E&P) business — to be named WPX Energy Inc. — “as soon as market conditions are cooperative,” said the CEO. The Tulsa-based company plans to split itself into two standalone publicly traded corporations via an IPO of up to 20% of Williams’ interest in the E&P and in 2012 plans a tax-free spinoff to shareholders of the remaining interest (see Daily GPI, Feb. 17).
The IPO, said Armstrong, still is scheduled to be launched before the end of September with the spinoff of the remaining interest in WPX in 1Q2012. However, CFO Don Chappel admitted that the timing “could change if market conditions remain challenging.”
The tumult in the stock market and lower oil prices led a couple of analysts to question some of Williams’ midstream prospects. Following the E&P spinoff Williams would operate a natural gas pipeline and infrastructure business spread across North America and into the Gulf of Mexico. Dow Chemical Co. and others are finding opportunities to take advantage of the abundance of natural gas liquids (NGL) from shale production to use in their feedstock operations (see Daily GPI, April 25).
In March Williams agreed to invest C$311 million to expand two Alberta off-gas facilities to produce up to 17,000 b/d of ethane and ethylene for Canada’s NOVA Chemicals Corp. (see Daily GPI, March 29). The expansions, which are set to begin operations in early 2013, would add incremental ethane supplies in Alberta to support Canada’s petrochemical industry.
Armstrong was asked if weaker oil prices have begun to turn petrochemical companies “away from ethane feedstocks,” and whether that would affect any of Williams’ midstream plans.
“We’ve got a long ways to go before getting into that territory,” said the CEO. “Gas has moved down as well. We’re not anywhere near to get to [switching]. We have seen where gasoil is at times pricing below ethane a little bit but it has a long ways to go. I don’t really see that in $80 price for oil, $4 gas. That’s still a 20:1 ratio. That’s something we used to not be able to dream of. We’re a long ways from when ethane was not a favored feedstock.”
Williams is “still long on ethane,” he said. The Canadian project “gives us some hedge on ethane pricing on ethylene margins. We are fairly confident on gas-to-crude margins remaining and we are confident that the feedstock margins are there. We’re not so confident of who makes what that gets what cut of that pie. We feel like if we were derisking some of those margins, somebody else would get stuck between us and the full margin. We are taking to a number of parties on offtake agreements; there’s a lot of interest in that kind of project.”
If there continues to be a “weaker environment” for oil prices, Armstrong was asked, how would that affect petrochemical companies in building new steam crackers? Would it delay any decisions or lead to an “oversupply” of fractionation capacity?
“First of all, the market for all the new olefin capacity built in North America is not focused on North American markets,” said Armstrong. “So the global economy is the thing to keep an eye on there and expansions around the globe are critical to that. We do think a continued downturn would have people backing up.
“We are ‘first in the queue,’ so to speak…but people will be checking and double checking [as to whether] if we were going into another recession and there’s not much doubt in my mind that would be the case. As to whether there’s ample cracker capacity to build fractionation, that’s a complex question. Clearly, NGLs are building up very rapidly. There is going to have to be cracking capacity to build that. But it’s a little too early to call that give the near-term events we are seeing.”
Rory Miller, president of Williams midstream operations, noted that there were “a lot of announced projects” for expanding petrochemical crackers “and while not all of them are going to get built, a number of them can…Our timing is right and there’s a window of opportunity ahead of the other announced projects…”
The shale plays are creating “a lot of emerging bottlenecks in a lot of different places” for pipelines, said Armstrong. “A lot of infrastructure is required in the field and we are keeping our eye on that…As that grows, and we think it will, we continue to see the need for infrastructure” in some of the oily shale plays, including the Bakken “as well as on propanes and heavies [NGLs], the petrochemical business in general. There’s been a lot of shifting in light NGLs, heavy NGLs, olefins products. It’s positioning us for a big shift.”
The CEO said he continues “to be confident about the balance of 2011 and 2012…Williams fundamentals are sound. On NGLs, I’m very confident in the margins as they exist today partially because of how high the margins go to at the end of 1Q2011. There’s plenty of room to slip down and still maintain [Williams] guidance. I have not seen degradation in that market in the last couple of days that we might be expecting. I’m confident on 3Q2011 and the balance of the year.”
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