The biggest challenges facing El Paso Corp. in 2005 will be hitting a $2 billion debt reduction target, getting its cost structure under control after more than $4 billion in asset sales over the last couple of years and turning around its exploration and production (E&P) business, CEO Doug L. Foshee told analysts at the UBS 2005 Natural Gas and Electric Utilities Conference on Wednesday.
"We went into 2004 with a big question in a lot of peoples' minds literally about El Paso's survival, and I believe we go into 2005 with most of the questions around whether or not we will be able to grow the company," said Foshee. "I can tell you that [there has been a] dramatic change externally but, more important, internally in terms of the perspective of our own employees."
He said the company has made considerable restructuring progress to date. "We certainly are not claiming victory; we have a lot of hard work left to do but we have made progress."
El Paso is a much smaller organization today than it was in 2003 when it had 15,000 employees, including 2,200 at the holding company level. There has been a 25% reduction in the overall head count and an even greater reduction in the number of businesses in which El Paso operates. In 2003, El Paso was involved in about 15-20 different industries. Today it is focused on only two -- pipelines and exploration and production -- with a few lingering non-core assets that remain to be sold.
Despite exceeding its $3.9 billion asset sales targets set in 2003, the company still has a substantial number of assets on the block this year, including power assets in Asia and Central America, the Cedar Brakes 1 and 2 power restructuring contracts (already being sold to Bear Stearns affiliate Arroyo Energy Investors LP, with related obligations transferred to Constellation), a significant power turbine inventory, a chemical plant in Canada, several midstream gas assets and real estate in Chicago. Foshee said the company will outline at its March 17 meeting with analysts exactly what the company's expectations are for these asset sales.
El Paso has reduced its debt by $5 billion since late 2003. "We believe we have earned back some credibility in the marketplace with regard to our ability to predict and then execute on asset sales, both in terms of timing and amount," said Foshee. "Our goal now is to be down to $15 billion [in debt], an incremental $2 billion in debt reduction by the end of 2005."
He said El Paso's pipeline operations were never a significant concern and continue to perform well with most of the recontracting issues addressed on Southern Natural Gas and on El Paso Natural Gas. In addition, the company has numerous new pipeline projects planned and is well positioned to take advantage of changes in gas supply due to the expected increase in imports in liquefied natural gas.
Perhaps its biggest challenge will be turning around its E&P operation. Last fall, El Paso Corp. reported financial restatements for 1999 through 2003 that resulted in a loss to shareholder equity of about $2.4 billion. Of that amount, nearly $1.7 billion was lost from a 41% negative revision (a 1.8 Tcf reduction) of its natural gas and oil reserves. The accounting review that led to the revisions also led to a personnel shake up in the E&P unit.
"Fixing our production business is a long term process of change, but we think we have made significant progress in the last nine months," said Foshee. He said there has been a cultural change, with employees now more focused on the smaller issues, the "blocking and tackling issues, focusing people on risk adjusted rates of return and net present value for dollars of capital spent, and putting in place compensation systems and accountability systems that ensure that people get paid for performance."
He said the company has continued to shift where it is spending capital in order to alter its reserves position. "As we have continued to change the mix of where we spend capital, we believe we will continue to change our reserve mix which will do a few things: reduce the level of risk in our reserve profile and our production profile; and increase our reserve life index."
He said the company already has a lower risk portfolio of prospects than it did early last year. "We have begun to see some signs of production stabilizing." He said the company saw a precipitous drop in production from the first quarter of last year to the third quarter in several regions but "somewhat of a flattening in onshore Gulf Coast properties for the third and fourth quarter. I would say the Texas Gulf Coast is probably our biggest challenge.
"In the onshore region, volumes are up nicely about 7% between the first quarter and the fourth quarter. This is an area dominated by our coalbed methane reserves, and an area that will see an increasing proportion of our capital spending in 2005, which will change our reserve mix and our production profile.
"We are already seeing signs that our inventory in the Gulf of Mexico of projects and prospects is beginning to show signs of life and we look forward to 2005 being a good year for our Gulf production unit." But he said El Paso would be less dependent on Gulf of Mexico production in the future.
Foshee noted that the company has made four E&P purchases in the last nine months and expects to make more purchases of assets that fit closely with its existing portfolio and strategies.
"I think you will see more progress in 2005 as we continue to do two things: one is delever the company but secondly derisk the company. Everything in our risk profile will shrink in 2005... The production profile in our E&P business will change and it will change in a manner that will [result in lower risk]."
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