Williams Beats, Guidance Revised

Williams Companies (WMB - Analyst Report) announced stellar first quarter 2012 results, backed by strong performances from fee based business units along with substantial margin growth.

For the first quarter, Williams’ earnings per share, excluding special items, came in at 39 cents, breezing past the Zacks Consensus Estimate of 36 cents. Comparing year over year, earnings improved 39.3% from 28 cents.

The company generated revenues of $2,019 million, ahead of our expectation of $1,847 million. Quarterly sales also climbed 7.9% from prior-year level of $1,871 million.

Total adjusted segment profit was $598 million in the quarter, up 15% year over year.

Segment Analysis

Williams reports its results in three segments (following the spin-off of Exploration & Production unit): Williams Partners that includes the company’s 72% owned master limited partnership Williams Partners L.P. (WPZ - Snapshot Report); Midstream Canada & Olefins; and Other.

Williams Partners: This segment reported adjusted operating profit of $489 million in the quarter, up from the year-ago level of $437 million, reflecting a well-performing gas pipeline business (attributed to strong contributions from the expansion projects) along with higher fee-based revenues and natural gas liquids (NGL) margins in the midstream business.

Midstream Canada & Olefins: The segment registered quarterly adjusted operating profit of $103 million, higher than $74 million recorded in the first quarter of 2011. This year-over-year improvement can be attributed to higher volumes as well as improved per-unit margins on Geismar ethylene.

Other: The segment’s adjusted operating profit was $6 million, as against $9 million in the prior-year quarter.

Capital Expenditure & Balance Sheet

During the quarter, Williams incurred a capital expenditure of $329 million, of which almost 78% was invested in Williams Partners. As of March 31, 2012, the partnership had cash and cash equivalents of about $1,100 million.

Guidance

Williams guided earnings per share in the range of $1.20–$1.60 (versus $1.15–$1.55 earlier) for 2012, $1.35–$1.75 (unchanged from the last guidance) for 2013 and $1.55 - $2.10 (against the previous forecast of $1.55–$2.05) for 2014.

Williams expects to generate total adjusted operating profit of $2,075 million to $2,700 million in 2012, $2,350 million to $3,000 million in 2013 and $2,625 million to $3,375 million in 2014.

Capital expenditure is projected to average $6,600 million for 2012, $3,075 million for 2013 and $2,375 million for 2014.

Dividend

Williams plans to make a dividend payout of $1.20 per share for 2012, up 55% from the 2011 levels. For 2013 and 2014, dividend is expected to improve 20% each year.

Our Recommendation

We believe that Williams will be able to generate highly visible cash flow and dividend growth over the next several years through strong operational performances by its business units. We also expect the recent strategic restructuring to further enhance the company’s value by improving the competitiveness of the midstream and gas pipeline assets.

However, we remain worried about low natural gas prices, which are likely to restrict near-term growth prospects at Williams. We also apprehend that the upside potential of the company will remain limited until it has fully reaped the benefits of the spin-off.

Hence, we maintain a long-term Neutral recommendation on the stock that is supported by a Zacks #3 Rank (short-term Hold rating).