Tickers in this Article: WMB, REXX, XOM, BBG
The exploration and production segment of Williams Companies (NYSE:WMB) is the 10th largest producer of natural gas in the United States, but is often overlooked by many investors as it represents a small part of the entire company.

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This segment is poised to begin a multi-year growth spurt that will increase that segment's profit to more than $1.7 billion in 2012. This growth will move exploration and production profits to 39% of the company's total by 2012, up from 27% in 2009.

Overview
Williams Companies has a wide range of exploration and production assets scattered across the United States. The company reported proved reserves of 4.8 Tcfe and more than 1.2 million acres under lease as of December 31, 2009. The company's production in the first quarter of 2010 averaged 1.156 million cubic feet equivalent per day. (Drill down into financial statements to tap into the right companies and let returns flow. For more information, read Unearth Profits In Oil Exploration And Production.)

Piceance Basin|
The Piceance Basin in Colorado is the most developed area for the company, and contains 75% of its proved reserve base, and approximately 50% of its production.

The company's operations here are divided into two areas. The Piceance Valley is the more developed area and will have expanding operations in the years to come. Even with that huge base of operations, the company has 4800 undrilled locations to develop on a 3P (proved, probable and possible) basis.

Williams Companies has 78,000 net acres in the Piceance Highlands and has had that area under development for several years. The company has 304 wells on line here producing 63 million net cubic feet equivalent per day. Williams Companies plans to operate 4 rigs here in 2010 to develop over 6,000 locations.

The economics of drilling in the Piceance Basin are obviously dependent on the price of natural gas, and Williams Companies projects that the typical well in the Piceance Valley and Piceance Highlands will earn an after-tax return, based on the internal rate of return, of 44% and 20%, respectively.

However, the company is using a natural gas price of $5.41, which is based on the average price over the last three years. The after-tax return drops quickly if a lower natural gas price is realized, but is still in positive territory even at a price of $3.41.

Other operators in the Piceance Basin include Exxon Mobil (NYSE:XOM), which has been in the area since the 1950s, and Bill Barrett Corporation (NYSE:BBG), which had 532 Bcfe of proved reserves as of the end of 2009.

Marcellus Shale
Williams Companies is just starting up a position in the Marcellus Shale in Pennsylvania. The company signed a joint-venture agreement with Rex Energy (Nasdaq:REXX) and has a 50% interest on 44,000 net acres. Williams Companies became the operator on the joint venture acreage and took over drilling in the second quarter of 2010.

The company is also building a position outside the joint venture and just added a 10,000 net acre tract in Columbia County. This is still a minor part of the company, and Marcellus production in the first quarter of 2010 averaged only 4 million cubic feet equivalent per day.

Barnett Shale
Williams Companies has 34,000 net acres in the Barnett Shale in Texas, and has current production of 62 million cubic feet equivalent per day. The company is developing its acreage in Denton County, and estimates production of 84 million cubic feet equivalent per day by the end of 2010.

Williams Companies is also evaluating other shale plays including the Eagle Ford Shale in Texas, and the Bakken, where the company has 5,000 acres under lease.

Bottom Line
All this activity will increase production by double-digit percentages annually through 2012, with daily production in that year estimated to be in a range from 1.5 to 1.7 billion cubic feet equivalent per day.

Although Williams Companies is known primarily for its pipeline and other operations, the company has a large exploration and production segment that will grow quite quickly over the next few years. (For more stock analysis, check out Big Energy Dividends.)

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