Maureen Lorenzetti
OGJ Online
NEW YORK, Sept. 6 -- Diversified energy company Williams Cos. Inc., Tulsa, plans to continue growing aggressively next year with a capital expansion budget that will be "very robust," Chairman Keith Bailey said Thursday.
Bailey said Williams expects to spend $3-5 billion on internal projects, not counting possible acquisitions.
"We are seeing more opportunities than we have ever seen in our history, and we have reached a scale we've never seen in our history," Bailey told OGJ Online on the sidelines of the Lehman Brothers energy conference.
Bailey declined to detail where the new spending will occur but said that it "won't drop below $3 billion and could reach $5 billion." One area Williams may consider is expanding its gas production portfolio. Last March it bought Rocky Mountain producer Barrett Resources Corp. Williams remains interested in building its base in North America, including Canada.
"If you had a poster child with what you wished to accomplish with an acquisition or major investment, it [Barrett] fills the criteria and the transaction was done at a rational price level," Bailey said. Barrett moved Williams's leadership position in gas production to a level comparable with its already dominant position in pipelines, he said.
Meanwhile, the production provides a natural hedge for gas demand being generated by electric power activities, Bailey noted. As with the more recent Devon Energy Corp.-Anderson Exploration Ltd. merger, Wall Street first decided Williams paid too much for Barrett.
But Bailey said analysts didn't understand the large potential for proven reserves Williams saw, or the hedging position the company used in its gas contracts that "will take us through a couple of cycles in the gas price curve."
Bailey echoed the lament of many energy executives here, integrated or independent, that Wall Street just doesn't get it when it comes to judging the value of their businesses. With the exception of independent refiners, energy stocks recently have taken a beating in the stock market, victims of a general eroding confidence in the US economy and concerns that oil and gas prices are starting to hit a downward cycle trend again.
"If you look at where the sector is trading with the Standard & Poor's average, it is nonsensical to me, because these are businesses that operate in a sector of the economy that is absolutely essential.
"We have companies that as we look across the sector, are performing well, and yet we are trading at a discount relative to the average of S&P."
Like its nearest competitor, Enron Corp., Houston, Williams expects earnings to grow 20% "for the foreseeable future," Bailey said (OGJ Online, Sept. 5, 2001). "That suggests we should be trading at the top end of the range, but we are trading at the bottom of the range. So I think it's [the stock] a great opportunity for people."
While Bailey may agree with Enron over undervalued stock prices, he does not share its chairman's views on when or if the California energy mess will end. Williams earlier this week said its exposure to unpaid power bills in California through Apr. 6 is $591 million.
California still a problem
"I don't know if the name calling is over. That's a mode California is in and don't think that is apt to change dramatically," Bailey said. "Certainly the mild summer, the fact that supplies came back on the market, and prices moderated, have taken it off the front page and cooled the political rhetoric. But it's just one rolling blackout away from heating up again."
Even with the bad experience in California, Williams is still optimistic wholesale and retail energy competition is here to stay, although the pace may have slowed. However, Bailey cautioned the traditional regulatory model for generation and commodities needs further updating.
"The regulators have moved away from willingness to have customers pay for standby capacity, and if that continues you won't see capital formation of any significance in traditional regulatory businesses," he said.
He noted a similar problem with wholesale gas markets.
"If you look at rates of return that are being offered [by the Federal Energy Regulatory Commission], they have not changed appreciably in 10 years, but the risk associated with building the lines has gone up dramatically," Bailey noted. "That's because of contract durations, and the basic sanctity of contracts has been weakened."
He warned while gas pipelines now look "marginally" attractive to Wall Street, things could change dramatically depending on future FERC rulings. "Everyone's a FERC watcher now," he said, noting the make up of the 5-member board has changed dramatically since President George W. Bush took office.
He predicted that no matter whom Bush nominates to fill out the FERC board since the departure of former Chairman Curtis Hebert, the agency will likely continue to rely on market forces.
With respect to the market, Bailey said recent incidents, including the problems in California, reflect tight supply and demand, but not necessarily an energy crisis.
"Reality is ... we have an energy infrastructure in tight balance with demand and it takes little to upset that balance as we saw with the Citgo refinery fire and what it did to gasoline," Bailey said. "But it was moderated because the administration took a sensible move and lifted on a temporary basis the environmental regulations that exacerbated the situation" (OGJ Online, Aug. 28, 2001).
Market more reliable
Yet more direct government intervention, such as creating mandatory inventory levels for transportation and heating fuels, as some have called for in Congress, is not only impractical but dangerous, he said. "If the government intervenes, for the most part they get the opposite outcome they were trying to control."
The market, not government, is the best allocator of resources, he said, and right now a tight balance still exists. As a result, more investment is needed to help the economy ride out the highs and lows of commodity market cycles that are becoming more frequent and dramatic.
"If we do not do the right thing, that tight balance could turn into a systemic shortage, and then it could be turned into a crisis because the economy is energy dependent," Bailey said. Conserving energy instead of seeking to find and deliver more supply is another approach, but Bailey does not think that is a practical viewpoint.
"There are some people who think less energy is better, but I am not in that camp. Our standard of living is tied very directly to energy sector, and it's important we have an investment climate that continues to allow us to invest in infrastructure and resources."
Bailey said the reason for the shorter and more intense commodity cycles is due in large measure to today's information age. Faster computers and better technology have increased the amplitude and shortened the business cycles so much that people are pressured to react quickly, he said. "You get a lot of data but are not necessarily better informed," Bailey said.
He pointed to the recent dramatic market correction based on faulty gas inventory reports as a case in point. "American Gas Association or American Petroleum Institute numbers come out and you see huge movements, and then you see a correction, and then another huge movement -- and in neither case is it reality."
Williams uses its own trading model to hedge risk. Bailey said to manage risk, one has to pay a lot of attention to the duration of the cycle. "Either ride the tide and be very quick in gauging the market mood, or have some fundamentals you build strategy around and stay true to those. You have to have a lot of confidence."