Can Williams Find a New Energy Level?


By Heesun Wee Williams Companies (WMB), a Tulsa-based energy outfit, recently announced that it would sell some refineries and other petroleum assets -- businesses that could fetch at least $1 billion, says a company spokesman. Williams also plans to lay off up to 16% of the workers in its energy-trading group. The timing couldn't be better because Williams could use the savings and extra cash.

Since Enron imploded six months ago, Williams and a slew of other energy concerns have been criticized for high debt loads and questionable trading practices. Of course, about one-and-a-half years ago, companies were scrambling to emulate Enron. Today, though, "investors are not looking to energy trading as being a business in and of itself," says Patti Harper-Slaboszewicz, an energy expert for consultancy Frost & Sullivan.

TALL ORDER. Shares of Williams and its competitors have taken huge hits. Williams' stock slid to a fresh 52-week low of $5.30 on June 27 -- that's down a massive 84% from its latest yearly high of $34.41 in August. Yet Williams is still on the recommend list of some equity analysts, including Merrill Lynch's Carl Kirst, who has a strong buy rating. Kirst argues that Williams can recover once its credit outlook stabilizes and credibility returns to the sector, according to a recent research note. A tall order but achievable in Williams' case, several analysts say.

Topping the turnaround to-do list is getting past several investigations. Williams denies that it exported electric power from California -- to avoid price caps -- and then resold, or "ricocheted," it to the state at higher prices. Analysts believe that the probes will clear Williams, but the investigations could drag on for quite a while. Williams must also reduce its debt-to-capital ratio of 60%-40% down to 50%-50% and in line with peers. And it needs to continue trimming its exposure to energy trading and marketing.

These two activities have been Williams' most profitable core business by far, pulling in an operating income of $1.2 billion, or half of total revenues, in 2001. But investors don't want any part of it right now, and Williams seems to be listening. It says it'll limit liquidity and working-capital commitment for its risk management and hedging activities to $1 billion, from $1.5 billion. "Demand is strong for the kind of long-term risk-management deals that are Williams' strength, but the necessary credit confidence is absent throughout this industry segment," CEO Steve Malcolm said, in a prepared statement on June 10.

TELECOM HIT. As if its energy-trading troubles weren't enough, Williams has also been hurt by its exposure to the depressed telecom business. In April, Williams Communications Group -- spun off from its parent -- filed for bankruptcy protection amid slumping demand and a network-capacity glut. Parent Williams took a related $2.05 billion charge against its 2001 earnings.

This year doesn't look too bright, either. On June 10, Williams lowered its guidance for earnings per share to a range of $1.35 to $1.70, down from the previous estimate of $2.15 to $2.30. If it delivered on the low end of expectations for 2002, that would be a 42% tumble compared to 2001 earnings per share of $2.35.

To make matters worse, Williams is still contending with regulatory probes that extend beyond the ricochet charges, such as inquiries into allegedly driving up natural-gas prices in California by cornering the market.

Williams has denied any wrongdoing. Spokesman Jim Gipson adds that it's cooperating with information requests from the Federal Energy Regulatory Commission, seemingly avoiding penalties such as having to do business in a more regulated environment and losing its trading license.

NEAR-JUNK DEBT. Still, the publicity surrounding investigations can take a toll on the stock amid Williams' efforts to strengthen its balance sheet. With total consolidated debt at roughly $15 billion, Williams says it's aiming to shave off about $3 billion by selling $1.5 billion to $3 billion in assets and issuing $1 billion to $1.5 billion of equity, among other measures.

Given Williams' debt load, and other factors, Standard & Poor's and Moody's Investor Service recently downgraded its debt to near-junk status: BBB- for S&P, and Baa3 for Moody's. "We want to see a large equity issue or a large asset sale, or a combination of both," says Jeffrey Wolinsky, a credit analyst for S&P (both S&P and BusinessWeek Online are owned by The McGraw-Hill Companies).

Likely candidates for sale include its ethylene business and nonstrategic exploration and production properties that are used to gather and process natural gas in the field, says Rebecca Followill, an analyst who covers Williams for Howard, Weil, Labouisse. This business, called energy services, accounts for the bulk of Williams' income. (Williams became a leader in this field after it announced a deal in May, 2001, to acquire Barrett Resources for $2.8 billion.) In 2001, energy services recorded an operating income of $591 million, or 24% of total operating income of $2.4 billion.

MUCH FIXING TO DO. In contrast, many analysts expect Williams to keep its core assets, including its natural-gas-pipeline systems. It's the nation's second-largest transporter of natural gas by volume, behind El Paso. The gas-pipeline business contributed 27%, or $673 million, of total operating income in 2001.

Williams isn't alone in its woes. Aquila (ILA) recently cut its wholesale energy operations staff, including trading, by a third. Dynegy (DYN) announced the replacement of its chief financial officer, which follows the resignation of its CEO in May. It also said it would cut the dividend and sell assets to raise cash. Plus, chairmen of both CMS Energy (CMS) and AES (AES) have stepped down. (In May, former Williams CEO Keith Bailey, 60, announced his retirement, but it wasn't due to trading- or finance-related pressures. Malcom, already a Williams' executive, replaced Bailey as part of a planned transition.)

However, its peers' problems don't disguise the challenges facing Williams. "They have a fair amount of fixing to do," says John Olson, an analyst who covers Williams for Sanders Morris Harris. But Olson and other analysts say the concern's recent announcements are steps in the right direction. If Williams can deliver on its promises, it's one energy company that could rebound in the post-Enron era. Wee covers financial markets for BusinessWeek Online in New York


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