Williams Cos Misses, Revises

Williams Companies (WMB - Analyst Report) reported weak than expected third quarter 2011 results, hurt by steeper operating costs.

Earnings per share, excluding special items, came in at 40 cents, missing the Zacks Consensus Estimate by a penny. Comparing year over year, earnings improved 81.8% from 22 cents.

The company generated revenues of $2.70 billion, failing to meet our expectation of $2.98 billion. However, sales climbed 17.5% from the prior-year level of $2.30 billion.

Total adjusted segment profit was $643 million in the quarter compared with $435 million in the year-earlier quarter.

Segment Analysis

From first quarter 2011, Williams is reporting its results in four segments: Williams Partners, that includes the company’s 84% owned master limited partnership Williams Partners L.P. (WPZ - Snapshot Report); Exploration & Production (E&P); Other; and the newly formed Midstream Canada & Olefins (the company’s Canadian midstream and domestic olefins business).

Williams Partners: This segment reported adjusted operating profit of $477 million in the quarter, up from the year-ago level of $352 million, based on strong contributions from gas pipeline business coupled with higher fee-based revenues and higher NGL margins in the midstream business.

E&P: Total production increased 12.7% year over year to 1.33 billion cubic feet equivalent per day (Bcfe/d), aided by robust volume growth in the Piceance Basin (up 11.1% year over year) and San Juan Basin (up 12.5% year over year), partially offset by poor performance in Powder River Basin (down 1.7% year over year).

Williams' domestic average realized natural gas price increased to $5.41 per thousand cubic feet equivalent (Mcfe) in the third quarter from $5.09 Mcfe in the prior-year period.

Segment operating profit (excluding non-cash impairment charges) shot up 178.8% year over year to $92 million, aided by strong volumes and higher price realizations.

Midstream Canada & Olefins: The segment registered quarterly adjusted operating profit of $73 million, up from $42 million in the third quarter of 2010. This year-over-year improvement can be attributed to higher margins coming from Canadian butylene/butane mix product as well as improved per-unit margins on Geismar ethylene.

Other: The segment’s adjusted operating profit was $1 million, as against $8 million in the prior-year quarter.

Capital Expenditure & Balance Sheet

During the quarter, Williams incurred a capital expenditure of almost $739 million, of which 54.4% was targeted toward the E&P business segment and 38.6% expend on Williams Partners.

As of September 30, 2011, the partnership had cash and cash equivalents of about $996 million and debt of $9.38 billion, representing a debt-to-capitalization ratio of 54.3%.

Guidance

Management revised its 2011 earnings per share guidance to $1.40–$1.65 (from $1.35–$1.85) and expects to generate total adjusted operating profit of $2.37 billion to $2.65 billion. Capital expenditure is expected around $2.82 billion to $3.42 billion for 2011

Williams’ forecast for 2012–2013 adjusted earnings per share, cash flow from continuing operations and capital expenditure takes into account the upcoming Exploration & Production spin-off.

The company adjusted 2012 earnings per share forecast to $1.15-$1.55 (form $1.15–$1.60) and 2013 earnings per share outlook in the range of $1.20–$1.70 (against the previous forecast of $1.15–$1.80).

Williams expects to generate total adjusted operating profit of $1.97 billion to $2.52 billion in 2012 and $2.07 billion to $2.72 billion in 2013, while capital expenditure is expected between $2.52 billion and $2.92 billion for 2012 and in the range of $1.97 billion to $2.57 billion for 2013.

Our Recommendation

We like Williams’ strong upstream asset base and attractive growth prospects with core E&P and midstream segments poised to be the key growth drivers going forward. We also believe that the recent strategic restructuring will further enhance Williams’ value by improving the competitiveness of its midstream and gas pipeline assets.

However, Williams’ leveraged balance sheet and exposure to volatility in natural gas and natural gas liquids prices remain key areas of concern. We expect the company’s growth potential to be restrained with little room for meaningful upside from the current levels and maintain a long-term Neutral rating. Williams currently retains a Zacks #3 Rank, which translates into short-term Hold rating.

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