Williams Companies (WMB) reported stellar second quarter 2011 results, reflecting positive production figures across most of the shale plays coupled with benefits from strategic restructuring.
Earnings per share, excluding special items, came in at 39 cents, beating the Zacks Consensus Estimate by a penny. Comparing year over year, earnings improved 39.3% from 28 cents.
The company generated revenues of $2.67 billion, surpassing our expectation of $2.59 billion and climbing 16.6% year over year from $2.29 billion.
Total adjusted segment profit was $640 million in the quarter compared with $476 million in the prior-year 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); 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 $474 million in the quarter, up from the year-ago level of $345 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 6.5% year over year to 1.17 billion cubic feet equivalent per day (Bcfe/d), aided by robust volume growth in the Piceance Basin (up 11.4% year over year) and Barnett (up 21.1% year over year), partially offset by poor performance in Powder River Basin (down 3.5% year over year).
Williams' domestic average realized natural gas price increased to $5.58 per thousand cubic feet equivalent (Mcfe) in the second quarter from $5.06 Mcfe in the prior-year period.
Segment operating profit (excluding non-cash impairment charges) hiked 29.6% year over year to $92 million, aided by enhanced output in the Bakken Shale and higher price realizations.
Midstream Canada & Olefins: The segment registered quarterly adjusted operating profit of $72 million, up from $55 million in the second 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 $2 million, against $5 million in the prior-year quarter.
Capital Expenditure & Balance Sheet
During the quarter, Williams incurred a capital expenditure of almost $568 million, of which 63.7% was targeted toward the E&P business segment.
As of June 30, 2011, the partnership had cash and cash equivalents of about $1.17 billion and debt of $9.31 billion, representing a debt-to-capitalization ratio of 54.7%.
Guidance
Management increased its 2011 earnings guidance to $1.35–$1.85 (from $1.25–$1.85) and reiterated the 2012 earnings forecast at $1.45–$2.45. Williams expects to generate total adjusted operating profit of $2.27 billion to $2.90 billion in 2011 and $2.37 billion to $3.57 billion in 2012.
Capital expenditure is expected to be around $3.12 billion to $3.82 billion for 2011 and between $3.20 billion and $4.40 billion for 2012.
Our Recommendation
We believe that Williams offers a strong business mix, attractive growth opportunities in its low-risk upstream model and relatively stable fee-based midstream services. The company is also poised to benefit from the rebound in industrial activity that will see a growth in natural gas demand in the form of natural gas liquids.
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 current levels. Williams currently retains a Zacks #3 Rank, which translates into short-term Hold rating.
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