Big natural gas company Williams, which fought hard the past few years to lighten its considerable debt load, appears to be sailing out of troubled waters partly on the back of a rejuvenated exploration and production program.
Williams, more noted for its extensive pipeline network than its drilling, reached out to investors in a conference call Nov. 30, unveiling a substantial U.S. resource base partly supported by a previously undisclosed 4.3 trillion cubic feet of probable and possible gas reserves.
It was the first time the company publicly discussed its probable and possible reserves, something the ever-vigilant U.S. Securities and Exchange Commission does not recognize and even frowns on when reviewing a company’s true reserve base. The SEC recognizes only proved reserves, which in Williams’ case amounts to a reported 2.7 tcf.
Proved reserves are estimated quantities that geological and engineering data demonstrate with reasonable certainty to be recoverable from known reservoirs under assumed economic conditions. About 98 percent of Williams’ 2003 year-end domestic proved reserves were audited by Netherland, Sewell and Associates, or prepared by Miller and Lents.
“We would caution you that there is more uncertainty with respect to probables and possibles,” Steve Malcolm, Williams’ chief executive officer, told investors.
Looking to grow in core areas
Nevertheless, after cutting more than $5 billion from its debt-heavy balance sheet, largely through asset sales that included Alaska holdings, Williams appears poised for major growth, particularly on the E&P front through its core acreage positions in the U.S. Piceance, Powder River, San Juan and Arkoma basins.
“We believe we have premier positions in selected regions,” said Ralph Hill, Williams’ senior vice-president of exploration and production. “We worked hard to keep those as we went through the Williams restructuring.”
Hill said Williams already has regained nearly all of the 900 billion cubic feet of gas reserves it sold to help pay down debt, which now stands at less than $8 billion vs. $13 billion just a few years ago. During the past three years alone, he added, the company has been able to transfer 868 bcf of probable and possible reserves to the proved category.
“We expect to have similar levels of transfers this year and we expect that trend to continue,” Hill said. “It’s is not a question of whether the resource is there, it’s a matter of development in an expedient manner and also in a cost-effective manner.”
Average daily production up 18%
Williams’ average daily production volumes already have increased 18 percent since the beginning of 2004. In the third quarter of 2004, daily production from domestic and international interests was about 582 million cubic feet of gas equivalent, compared with 494 million cubic feet of gas equivalent at the beginning of 2004. The company expects daily production to grow to 600-700 million cubic feet in 2005 and to 700-800 million cubic feet in 2006.
Cash flow, aided by robust commodity prices, grew to $1.1 billion from $567 million during the same period. As a safety vale, the company said it would maintain “a liquidity cushion” of $1 billion.
“Obviously, given the progress that we’ve made in respect to our financial restructuring, (we’re) thinking more and more about the future and about growth,” Malcolm said. ”And each of our businesses offers exciting opportunities. But we’re talking about disciplined growth.”
Williams said it would take advantage of growth prospects by spending between $500 million and $575 million in 2005 on its E&P business alone, which the company expects would deliver between $400 million and $475 million in segment profit in 2005 and $450 million to $525 million in 2006.
Piceance basin ‘cornerstone asset’
Although Williams expects production growth from all of its U.S. core areas, the Piceance basin of western Colorado “is the cornerstone asset in our overall E&P growth story,” according to one Williams official who noted that over the past few years the company’s production has increased at annual rates of 22 percent and 37 percent.
“The basin has a long record of exceeding expectations in terms of production and reserves,” he said, adding that only about 30 percent of Williams’ 1.56 tcf of estimated proved gas reserves have been developed to date. Of the roughly 700 million cubic feet of daily production coming from the Piceance, 251 million cubic feet belong to Williams, making the company a dominant player in the region.
Moreover, the 1.4 million acre Mesaverde portion of the Piceance, the area Williams is most interested in, is said to contain anywhere from 100 tcf to 400 tcf of untapped gas reserves. Williams alone has identified some 3,000 drilling locations on its acreage in the Mesaverde.
In addition to finding, producing, gathering, processing and transporting natural gas, Williams also manages a wholesale power business. Williams’ U.S. operations are concentrated in the Pacific Northwest, Rocky Mountains, Gulf Coast, Southern California and Eastern Seaboard.
In addition to stepping up its E&P business, the company said it managed to capture a number of midstream projects in the deepwater Gulf of Mexico and is moving ahead with expansion of its Gulfstream pipeline system. The company also recently increased its stock dividend to 5 cents per share from 1 cent per share.
“Our corporate strategy has been all about reducing debt, moving us closer and closer to investment grade ratios,” Malcolm said.
