Williams Outperforms, Ups Outlook

Williams Companies (WMB - Analyst Report) reported better-than-expected third-quarter results, primarily on higher production volumes and lowering of costs. Earnings per share, excluding mark-to-market adjustments, came in at 25 cents, 6 cents above the Zacks Consensus Estimate.

However, compared to the year-earlier period, Williams’ adjusted earnings per share plunged approximately 55% while revenue nosedived 34% to $2.1 billion, hurt by weak performance of the company’s Exploration and Production (E&P) business on the back of a sharp decline in natural gas prices from the year-ago level.

E&P

In the E&P business, total production was up approximately 4.9% year-over-year to 1,202 million cubic feet equivalent per day (MMcfe/d). Domestic volumes increased 4.7% year-over-year to 1,148 MMcfe/d, driven by strong contribution from the Piceance and other basins. For the third quarter of 2009, average daily net production from the Piceance basin and other basins were both up approximately 6% from the year-ago level.

Despite strong domestic production growth, the E&P segment’s operating profit of $106 million collapsed 71% from the year-ago level. This was mainly due to a 40% slump in the company’s domestic average realized natural gas price to $4.2 per thousand cubic feet equivalent (Mcfe). The segment profit was pulled down even more by higher depletion, depreciation and amortization expenses.

Midstream

Williams’ Midstream segment reported an operating profit of $222 million, down 3% from the year-ago level, primarily due to lower natural gas liquid (NGL) and olefin prices, partially offset by higher NGL equity sales volumes and higher fee-based revenues. Total equity NGL sales volumes increased approximately 16.5% year-over-year to 317 million gallons, mainly due to the absence of hurricane-related unfavorable impacts in the Gulf region that hampered results during the third quarter of 2008.

Gas Pipeline

Operating profit in the Gas Pipeline segment was $157 million, down more than 9% from the third quarter of 2008. This year-over-year decline can be attributed to higher operating costs.

Gas Marketing Services

The Gas Marketing Services segment reported a profit of $6 million after mark-to-market adjustments, compared to a loss of $45 million a year ago. The profit was a result of an increase in realized gains associated with storage contracts.

Capital Expenditure & Balance Sheet

During the quarter, Williams spent $752 million on capital expenditure. As of September 30, the company had a long-term debt of $8.3 billion, representing debt-to-capitalization ratio of 49.9%. Williams has a current cash balance of about $1.6 billion.

Guidance for 2009

Management guided towards full-year 2009 earnings of 95 cents - $1.00 per share (up from the previous guidance of 75 - 90 cents). Capital expenditure during the period is expected to be around $2.7 billion.

We currently rate Williams shares as Neutral.