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Strategies & Market Trends : Value Investing

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To: E_K_S who wrote (38902)	8/21/2010 11:53:24 AM
From: Spekulatius	of 78748

re WMB - I think it's a great asset play but the return on investment in the E&P sector is just plain awfull. it's just another example to show that all those NPV and IRR calculations don't add up. For example in one of those presentations, they go through the economics of a Piceance well (P18) and get a 44% IRR after tax.: williams.com Sound great but how come their whole E&P only made 500M$ annualized (pre tax) on 10.4B$ of assets (per latest quarterly report)? That is 5% pretax and does not earn WMB's cost of capital, which is around 7% currently. Apparently with this IRR calculations, they forget to allocate, cooperate overhead, the interest cost (it often costs 5 years with interest on capital outlay racking up until all wells are drilled and the IRR is based on average cost etc. etc.). This applies to many E&P's not just WMB. I wish WMB would spin off the E&P or let it go into runoff mode, pay back some high yield debt and build on their pipeline business which earns about 10% return on assets and is lower risk.

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