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El Paso's E&P Stabilizes, Expects to Boost Production with Acquisitions

El Paso's E&P Stabilizes, Expects to Boost Production with Acquisitions

El Paso Corp.'s exploration and production (E&P) business hit bottom in 2004, but with a complete restructuring, improved drilling results, two bolt-on acquisitions -- and a third expected to close this month -- the "offense is back on the field," said CEO Doug Foshee on Thursday.

Foshee presided over a 45-minute conference call with his executive team to provide a financial and operational overview of all company operations. He called 2004 a "watershed year" and "one of the toughest" for employees to endure. Management's job now is "to show it was worth the effort." El Paso enters 2005 "with a great deal more financial flexibility, and on the operational front, we continue to show progress on our long-range plan."

There were few details offered on what assets El Paso could pick up this year (more are expected in a teleconference in March), but Foshee said the company expects to make some bolt-on acquisitions that would be "incremental to the production target." And, "we will do all of this with a balanced portfolio approach to enhance results."

Lisa Stewart, who directs the E&P unit, said, "we realize we don't have an infinite amount of capital to spend" to improve production results, but the company now has the ability to make some deals.

Oil and natural gas production volumes slumped 30% in the first nine months of 2004, compared with 2003 because of declines in base production, asset sales and lower capital expenditures, said Stewart. Volumes shut in as a result of Hurricane Ivan, which occurred in September 2004, impacted average daily production during the nine-month period by approximately 4.5 MMcfe.

Daily production volumes averaged 776 MMcfe in 3Q2004 and rose slightly to 779 MMcfe in 4Q2004. Full-year 2004 daily production volumes averaged 829 MMcfe, including production from discontinued operations, principally production from Canadian properties sold early in 2004. This year, El Paso is pegging daily production at 800 MMcfe/d.

"I'm pleased with our progress in 2004 given all the obstacles we faced," said Foshee. "Our pipelines continued to deliver solid results, and we continued to capture a significant share of the expansion opportunities in our markets. In exploration and production, after a period of evaluation, we are now increasing our activity levels in key basins.

"The other remaining businesses continue to deliver on their commitments," he said. "We also made great strides in improving our financial health in 2004. We reduced net debt by $3.4 billion during the year and expect to continue to reduce debt this year. And importantly, we renewed our $3 billion credit facility for a longer term, at lower rates, and with fewer banks -- further evidence of our improving condition."

Even though the company is "pleased with this progress, we are not satisfied, and we look forward to showing continued progress throughout 2005."

Through the third quarter of 2004, El Paso reported a net loss of $404 million (minus $.63/diluted share), compared with a net loss of $1.643 billion (minus $2.76) for the first nine months of 2003. Significant items reduced 2004 earnings before interest and taxes (EBIT) by $385 million and $1.089 billion during the same period in 2003.

To stabilize earnings and reduce volatility in its trading book, El Paso's non-regulated group has purchased options that will create a $6/MMBtu floor for 60 TBtu of 2005 production and 120 TBtu of 2006 production. In addition, the group has designated as hedges 126 TBtu of positions in 2005 and 79 TBtu of positions in 2006 that were previously treated as mark-to- market positions in the company's marketing business. The action, said Foshee, will not affect the company's cash flow from operations.

The realized price for natural gas was essentially flat year to year, while oil, condensate, and liquids prices were up 24% in 2004. Total per-unit cash costs increased to an average of $1.17 per Mcfe compared with $.95 per Mcfe during the same 2003 period, as lower costs were more than offset by lower production volumes.

As of Dec. 31, 2004, El Paso had $2.4 billion of liquidity, comprised of $1.8 billion of available cash and $560 million of borrowing capacity under its credit facilities. The company defines "available cash" as cash on deposit or held in short-term investments that is easily accessible for general corporate purposes.

In another action, late in December a Maricopa County Superior Court approved a settlement by which El Paso Corp. will pay the state of Arizona $3.4 million, invest another $43 million in capital improvement projects in the state and accelerate $30 million in already-planned pipeline integrity expenditures. The settlement covers pending litigation against the company from the western energy crisis in 2000 and 2001.

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