Williams Companies Inc (NYSE:WMB) reported its second quarter of fiscal 2016 (2QFY16) financial results before the market close on August 1. The energy company posted significant decline in its earnings as low crude oil prices weighed down its financial performance.
The Oklahoma-based company posted adjusted net income of $146 million for the quarter. This was considerably up from the net earnings of $110 million in the same quarter last year and also from $26 million in the previous quarter.
Consensus had expected net income for 2QFY16 to be around $151.82 million but the company missed this estimate by 3.84%.
On a GAAP basis, the company recorded an unadjusted net loss of $405 million, down from net income of $114 million in the second quarter of last year. This adverse change came due to non-cash pre-tax impairment charge associated with sale of Canadian operations, increased interest expense, and impairment of equity method investments in the prior quarter. The loss for this quarter also foreshadows the absence of Geismar insurance proceeds worth $126 million incurred last year.
The company posted $0.19 earnings per share (EPS) in 2Q, up from $0.15 in the same period a year ago. The company failed to beat consensus estimate of $0.19 EPS by 4.52%.
Revenues clocked in at $1.73 billion, up from $1.66 billion in the preceding quarter. Analysts had expected the company to post revenue of $1.86 billion for the quarter.
Adjusted cash flow from operations in the second quarter amounted to $685 million compared with $814 million on year-over-year (YoY) basis. The strong cash flow from operating activities came in the wake of effective cost reduction during the quarter.
From the NGL & Petchem Services, the company posted Modified EBITDA of $429 million negative, down by $426 million on YoY basis. The decrease mainly came from project development costs worth $11 million and an impairment charge of $406 million in held-for-sale Canadian operations. For the upcoming quarters, Williams Companies plans to take additional cost saving measures to counter low oil prices.
Capital Spend and Dividend Payout
Reinvestment of around $1.7 billion in the business segment of Williams Partners by the company is expected in 2017. Funding for the investment will flow from the reduced quarterly cash dividend payout by the company. For 3QFY16, the company expects to reduce cash dividend to $0.20 per share from the current level of $0.64 per share, to fund the payout.
Earnings for 2QFY16 reflect low commodity price environment. Crude oil prices that crashed near $60 per barrel peaking from $115 per barrel still continue to extend declines — with West Texas Intermediate currently trading at $40.21 per barrel and Brent crude at $42.35 per barrel. Given that the prices have nearly doubled their lows since January, Williams Companies has considerably moved toward natural gas, demand of which has soared recently.
According to Alan Armstrong, CEO of the oil and gas major: “We own the premier natural gas focused asset base, and our strong performance in the second quarter once again demonstrates that our strategy positions Williams like no other company to benefit from growing natural gas demand.”
Presently, the company has several gas projects underway. These, when executed, will add 7.6 Bcf per day of capacity to markets served by Transco (TWWBF) over a few years from now. In two years, Williams Companies aims to double its capacity on Transco from 2010 levels.
“Quarter after quarter, the significant advantages of increased fee-based revenues are evident as we bring demand-driven projects into service. Additionally, as we execute on current projects, our assets continue to attract a steady number of requests for new market area capacity,” Mr. Armstrong stated.
Pointing to some key supply segments of the business, where the growth was slow, the company executed several cost cutting measures. "We executed quickly on these actions and are already realizing the benefits of these efforts in the current quarter and expect additional traction in subsequent quarters," Mr. Armstrong added.
Business Finance News believes that the shift toward gas market is likely to reap benefits. This will not only strengthen the company financially but will also increase its stockholder value and minimize risk. The stock is down by 6.01% and currently trades at $22.53 per share.
Toward the end of the second quarter, Williams Company was in the spotlight for its failed merger with Energy Transfer Equity. Having announced their merger agreement last September, the two oil companies aimed to combine and become a market leader in North America via earning synergies of $2 billion in terms of additional earnings before interest, taxes, depreciation and amortization by 2020.
However, the merger agreement was finally called off on June 29, as Energy Transfer failed to provide a tax opinion from its law firm, Latham & Watkins LLP. In order to complete the transaction, section 721 (a) tax opinion was necessary.
Owing to the failed merger, Williams Companies had to pay a breakup fee of $1.48 billion, a huge cash flow which reflected in the second quarter earnings. An appeal in the Delaware Supreme Court has been filed against ETE for calling off the deal.
While Barclays projects the final hearing of the merger to take place next month, latest update regarding the merger is to take place on the August 11, “when the first brief of the case is due.”
The energy giant has sought monetary damages from Energy Transfers and thus, we expect these to generate cash for the company as well as maximize shareholder benefit.