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Lower NGL Margins Spoil WPZ's 3Q

WMB WPZ

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Williams Partners L.P. (WPZ - Snapshot Report) has registered third-quarter 2012 earnings of 38 cents per limited-partner unit, down a significant 58.2% from the year-ago profit level of 91 cents. The results were also below the Zacks Consensus Estimate of 55 cents.

Lower natural gas liquid (NGL) margins in the partnership’s business during the second quarter of 2012 led to the significant year-over-year deterioration. Higher costs related to developing new businesses purchased earlier in the year were also responsible for the fall in earnings. However, higher fee-based revenue partially offset the weakness.

Quarterly total revenue contracted 8.7% year over year to $1,527.0 million, and failed to meet the Zacks Consensus Estimate of $1,918.0 million.

Notably, Williams Partners' distributable cash flow (DCF) attributable to partnership operations was $316 million against $368 million recorded in the year-ago quarter.

Recently, the partnership increased its quarterly cash distribution by 8.0% year over year to 80.75 cents per unit.

Segment Performance

Consolidated adjusted segment profit was $384.0 million, down approximately 19.5% from the year-ago level of $477.0 million.

Gas Pipeline: The segment reported profits of $155.0 million, down 8.8% year over year. Increased costs associated with pipeline maintenance, employees, selling, general and administrative led to the downfall.

Midstream Gas & Liquids: The segment’s profits decreased 27.6% year over year to $218.0 million. The underperformance was mainly due to the rapid decline in NGL prices that lowered the NGL as well as marketing margins. Again, higher expenses associated with its recent acquisitions also contributed to the downside.

However, the segment’s fee-based revenues experienced a 12% year-over-year boost on higher volumes in the partnership’s Susquehanna Supply Hub area and Ohio Valley Midstream area of the Marcellus Shale as well as in the recently acquired Ohio Valley Midstream system.

Guidance

Recently, Williams Partners updated its outlook for 2012, 2013 and 2014 to reflect the purchase of the Geismar and Gulf Olefins properties, as well as lower projected rate of growth in gathering volumes.

The partnership maintained its 2012 distribution per unit of $3.14, an 8% increase over 2011. Taking into consideration the midpoint of the guided range, the partnership expects full-year distribution for 2013 and 2014 to increase by a respective 9% to $3.43 and $3.75.

Williams Partners has adjusted its 2012 DCF expectations to $1.5 billion for 2012, $2.1 billion for 2013 and $2.7 billion for 2014.

Total adjusted segment profit will likely be in the range of $1,655–$1,795 million for 2012, $1,950–$2,350 million for 2013 and $2,575–$3,025 million for 2014.

The capital expenditure for 2012 is expected around $8,029 million to $8,304 million, while $3,025 million to $3,425 million for 2013. For 2014, Williams Partners projected capital expenditure between $1,700 million and $2,100 million.

In Conclusion

Williams Partners retains a Zacks #3 Rank, which is equivalent to a short-term Hold rating.

Williams Partners is an energy master limited partnership engaged in gathering, transportation, treating and processing of natural gas as well as fractionation and storage of NGLs. The general partner of the partnership is owned and managed by Williams Companies Inc. (WMB - Analyst Report).

In a separate press release the partnership announced that it has inked an agreement with its parent company, Williams, to purchase about 83% interest in the Geismar olefins production facility and Williams’ refinery grade propylene splitter for $2.264 billion.  Williams Partners also acquired pipelines in the Gulf region for another $100 million from Williams.

Williams Partners will also be responsible for completion of the expansion of the Geismer facility, which is estimated to cost about $270 million along with the expenses of around $160 million for additional pipelines. The inclusion of the olefins production facility in Geismar to Williams Partners’ portfolio will help it augment its distributable cash flow for the partnership's unit holders. The acquisition will also aid the partnership in ascertaining its cashflow as its exposure to the over-supplied ethane markets will be reduced.

However, we remain apprehensive about the partnership’s midstream segment owing to the weak NGL price fundamentals. Williams Partners’ third-quarter 2012 results witnessed a marked deterioration owing to the weak NGL market as well as hike in operational cost.

Although the partnership aims to rapidly reduce its commodity based exposure in its midstream business by shifting to more of a fee based business model going forward, we believe it will take time to recognize the true benefit of it.
 

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