El Paso Corp. posted a tepid first quarter profit on Tuesday, stung by weak natural gas production and hedging losses. However, the Houston-based company reversed its losses from a year ago, lifted by strong natural gas pipeline and field service earnings.
Answering questions following the company's 1Q2005 earnings announcement, CEO Doug Foshee reiterated that El Paso plans to meet its goal to revamp operations by the end of 2005. By year's end, more asset sales will be announced, more debt reduction will be completed, and, he added, only two core businesses will remain: domestic natural gas pipelines and exploration and production (E&P).
"We've said consistently that 2005 is our last transition year," said Foshee. "Our goal by the end of this year is to be down to two core businesses...Three years ago, we were in 20 industries. We think we've made good progress toward that goal, and we expect to complete that goal by the end of this year."
For the quarter, El Paso reported net income of $106 million (17 cents/share), 4 cents below Thomson First Call estimates, but a reversal of 1Q2004, when it reported a net loss of $206 million (minus 32 cents/share).
Significant items in the quarter mostly related to a gain on the sale of remaining general partner interests and common units in Enterprise Products Partners, offset by impairments on some power assets and adjustments for the early payoff of the western energy settlement, which increased 1Q2005 earnings by $31 million. Impairments on asset sales and restructuring costs decreased 1Q2004 earnings by $269 million.
"We continue to make progress on all fronts," said Foshee. "Our pipelines delivered solid financial results, and growth prospects look good. Our production business is making the progress necessary to complete its turnaround this year, and it is ahead of the pace to replace production in 2005. Finally, in March we delivered an update to our long-range plan that accelerates our debt-reduction plans as well as our plan to be a company focused on two primary businesses: natural gas pipelines and production."
First quarter results also were negatively impacted by a noncash $106 million mark-to-market loss on the $6/MMBtu floors that El Paso purchased and the $9.50/MMBtu ceilings it sold to manage price risk for its 2005-2007 natural gas production volumes. At the end of 1Q2005, the positions had a remaining mark-to-market value of $11 million.
El Paso's bread-and-butter pipeline segment reported a $26 million increase in 1Q2005 earnings over 1Q2004, mostly from the positive impact of a contract restructuring on ANR Pipeline, as well as higher natural gas sales.
Jim Yardley, president of El Paso Southern Pipeline Group, told analysts that the unit remains focused on expansion opportunities, "across all pipes." El Paso continued working on new opportunities for liquefied natural gas (LNG) and infrastructure, specifically in the Gulf of Mexico, where it plans to "expand its footprint" through pipeline access. And, he noted there continues to be "significant opportunities for expansion in the Rockies."
Southern Natural Gas' $240 million Cypress Project already is fully contracted, Yardley noted. A filing is expected with FERC later this month or in June, and it is expected to be in service by May 2007. The 165-mile 24-inch pipeline, supported by 20-year agreements with BG LNG Services and Progress Energy Florida, will have a capacity of 220 MMcf/d.
Lisa Stewart, who took over El Paso's sagging E&P segment in January 2004, reported lower production from a year ago on lower volumes and higher costs, partially offset by higher prices. Capital expenditures also were higher compared with 1Q2004 because of acquisitions.
Generally, she said, quarterly production was consistent with El Paso's expectations. Although production was down from 1Q2004, volumes rose during the course of 1Q2005, and she said they now exceed 800 MMcfe/d.
"We anticipate a relatively steady pace of drilling activity for the remainder of the year," Stewart said. Three of the four regions El Paso participates in achieved higher production rates, with Texas Gulf Coast volumes down 10%. However, Stewart said the company is reassessing its lower-than-expected volumes onshore along the Texas Gulf Coast, and expects to see a "drilling gain" in the second half of 2005.
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