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North American energy firm, Williams Companies Inc. (WMB - Analyst Report) reported better-than-expected second-quarter 2013 earnings, aided by an improved production margin of olefins along with increased fee-based revenue.

Earnings per share (EPS) – excluding special items – came in at 19 cents, above the Zacks Consensus Estimate of 15 cents.

However, the EPS decreased from the year-ago adjusted profit of 22 cents due to a significant fall in natural gas liquid (NGL) margins.

Revenues of $1,767.0 million were down 4.3% from second quarter of 2012 and short of our $1,805.0 million projection. Lower product sales in the Williams Partners unit affected the results.

Segmental Analysis

Williams Partners: This segment reported adjusted operating profit of $404.0 million in the quarter, unchanged from the year-ago quarter. Segment performance was favored by increased fee-based revenues from transportation, gathering and processing. These factors were offset by decreased NGL margins.

Williams NGL & Petchem Services: The unit registered quarterly adjusted operating profit of $22.0 million, higher than $16.0 million in the second quarter of 2012. Increase in Canadian NGL product margins aided the results, which is partially offset by higher operating and maintenance expenses.

Access Midstream Partners: The segment reported an adjusted operating profit of $3.0 million.

Other: The segment incurred adjusted profit of $2.0 million, higher than the year-ago adjusted profit of $1.0 million.

Capital Expenditure & Balance Sheet

During the quarter, Williams’ capital expenditure was $817.0 million. As of Jun 30, 2013, the company had long-term debt of $10,359.0 million, representing a debt-to-capitalization ratio of 70.2%. Williams has a cash balance of about $824.0 million.

Guidance: For 2013, Williams guided EPS in the range of 70–80 cents (indicating a mid-point of 75 cents). The same for 2014 is projected between $1.00 and $1.30 (mid-point $1.55). For 2015, Williams projects EPS of $1.35 to $1.75 with a mid-point of $1.55.

Williams expects to generate total adjusted operating profit of $1,705.0–1,835.0 million in 2013, $2,260.0 –$2,715.0 million in 2014 and $2,860−$3,470.0 million in 2015.

Capital and investment expenses are projected at $4,145.0–$4,795.0 million for 2013, $3,985.0–$4,865.0 million for 2014 and $3,545.0–$4,575.0 million for 2015.

Additionally, Williams projects adjusted operating profit including depreciation and amortization to grow 60% between 2013 and 2015.

Williams maintained its previously announced annual dividend payout growth of 20% from 2013 to 2015. The company believes that significant growth in cash flows from its Williams Partners, Williams NGL & Petchem Services and Access Midstream Partners units will aid dividend growth.

Stocks to Consider

Williams currently carries a Zacks Rank #5 (Strong Sell), implying that it is expected to significantly underperform the broader U.S. equity market over the next one to three months.

Meanwhile, one can look at other energy production/pipeline entities like Cheniere Energy Partners LP (CQP), SemGroup Corp. (SEMG - Snapshot Report) and Western Gas Partners LP (WES - Snapshot Report) as attractive investments. All these firms carry a Zacks Rank #2 (Buy).


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