Williams Companies Inc. (NYSE: WMB), a large operator of midstream natural gas facilities, this morning lowered its profit outlook for 2012 and 2013 and raised it for 2014. The company also affirmed its planned full-year 2012 dividend payment of $1.20/share and confirmed its planned 2013 dividend payment of $1.44/share and its 2014 dividend payment of $1.75/share.
For the second quarter of 2012, Williams expects EPS of $0.21 compared with a consensus estimate of $0.33. The problem is lower prices for natural gas liquids (NGLs) as demand falls and supply rises. The company’s pipeline partnership, Williams Partners L.P. (NYSE: WPZ) will post “an unexpectedly sharp decline” in NGL margins in May and June, primarily due to the lower prices for NGLs.
For the past two years, the natural gas industry has abandoned new drilling in regions where only “dry” gas is common in favor of “wet” gas plays like the Marcellus and Eagle Ford shale plays. NGLs such as ethane and propane sold for much higher prices than natural gas and the sales of the NGLs helped offset natural gas prices below $3/thousand cubic feet.
The problem is that NGLs, though often added to oil production to produce a “total liquids” production number, are not used for transportation fuel. The compounds are used instead in a wide variety of industrial and chemical products, including plastics and fabrics. The demand for these products is more limited and could even be at or approaching a peak in the US.
The market for propane, often used for heating, is being eroded by low natural gas prices as well, and the market for butane is stagnant as well.
Williams’ problem is that it has exposure to NGL prices through 2013:
Regarding commodity prices, the company referenced an NGL-to-crude-oil price ratio that was approximately 40 percent below the 10-year average during the second quarter but recently rebounded somewhat. Key factors in the NGL market weakness have been high propane inventories caused by the extremely warm winter and the effect of the propane oversupply on ethane inventories and pricing.
For 2014, the company has this to say:
The company is increasing its earnings guidance for 2014 primarily due to an expectation that it will benefit from ethylene crack spreads similar to the first half of 2012 after spreads decline for the balance of this year and in 2013. The company expects continued high spreads between natural gas and ethylene due to the substantial pricing advantages over global ethylene derived from crude-oil based feedstocks.
Somehow, that outlook for 2014 is not very comforting. The company expects to benefit in 2014 from prices that are similar to those in effect now, when Williams is lowering its outlook? And sure, the ethylene spread will be better for natural gas than for crude oil, but that’s true even today. It seems that Williams is basing its projected profits on some magic formula that the company can’t reveal to the rest of us.
Investors don’t seem too unhappy though. Williams stock is down just -0.2% at $31.25 in a 52-week range of $21.90-$34.63.