Williams Companies ( WMB - Analyst Report ) reported soft second quarter 2012 results, owing to challenging natural gas market conditions along with higher acquisition related costs.

For the second quarter, Williams’ earnings per share, excluding special items, came in at 22 cents, in line with the Zacks Consensus Estimate. Comparing year over year, earnings plunged 24.1% from 29 cents per share.

The company generated revenues of $1,846 million, missing our forecast of $2,021 million. Quarterly sales also declined 7.0% from the prior-year level of $1,984 million.

Total adjusted segment profit was $421 million in the quarter, down 23.2% 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 $352 million in the quarter, down from the year-ago level of $474 million. The drop in performance was mainly hurt by deteriorating natural gas liquids (NGL) prices coupled with rising expenses.

Midstream Canada & Olefins: The segment registered quarterly adjusted operating profit of $68 million, lower than $72 million recorded in the second quarter of 2011. Reduced sales volumes and per-unit margins stemming from weak Canadian NGL scenario impacted the quarter’s results.

Other: The segment’s adjusted operating profit was $1 million, against $2 million in the prior-year quarter.

Capital Expenditure & Balance Sheet

During the quarter, Williams incurred a capital expenditure of $593 million, of which almost 82% was invested in Williams Partners. As of June 30, 2012, the partnership had cash and cash equivalents of about $679 million.

Guidance

For 2012, Williams guided earnings per share in the range of $1.05–$1.25 (indicating a mid-point of $1.15). The same for 2013 is projected at $1.20–$1.55 (midpoint is $1.38). The influence of NGL prices will likely pull down the earnings level in the next two years.

The company expects earnings in the range of $1.70–$2.20 (with a mid-point of $1.95) for 2014. The forecasted figure is nearly 59% higher than 2011’s earnings of $1.23 per share. A favorable mix of natural gas and ethylene spread is expected to boost William’s performance in 2014.

Tulsa, Oklahoma-based Williams expects to generate total adjusted operating profit of $1,900 million to $2,225 million in 2012, $2,125 million to $2,675 million in 2013 and $2,825 million to $3,475 million in 2014.

Capital expenditure is projected to average $6,700 million for 2012, $3,600 million for 2013 and $2,600 million for 2014.

Dividend

Williams plans to make a dividend payout of $1.20 per share for 2012, up about 55% from the 2011 levels. For 2013 and 2014, dividend is expected to improve 20% each year to $1.44 and $1.75 per share, respectively, aided by benefits from the fee-based business and the commencement of new projects.

Our Recommendation

We believe that the upside potential of Williams will remain limited in the coming days and hence, we maintain a long-term Neutral recommendation on the stock. Williams currently holds a Zacks #3 Rank (short-term Hold rating).