A huge loss on the market value of derivative contracts, coupled with write-offs for asset sales and in value of a power plant, pushed El Paso Corp. to a third quarter loss of $321 million (minus 50 cents/share), from a $214 million loss (minus 33 cents) in 3Q2004. Asset sales also sent revenue plunging 43% to $821 million from $1.4 billion.
Excluding one-time losses, El Paso would have earned 6 cents/share, but the figures were still well below Wall Street's average forecast of 15 cents/share on revenue of $1.07 billion. El Paso CEO Doug Foshee tried to put a good spin on the news, and told analysts during a conference call, "We are confident that 2006 will be a breakout year for the company."
The quarterly losses, he said, "detract from an increasingly positive story for El Paso. While a sharp rise in natural gas and oil prices created noncash losses during the quarter, we have significant earnings and cash flow upside as the percentage of our hedged production declines going forward. As we approach next year, our core pipeline and production businesses are performing well, and we are confident that 2006 will be a breakout year for the company."
The biggest hit to quarterly earnings was the negative impact of a noncash, $390 million mark-to-market loss in the marketing and trading segment on derivative contracts that El Paso entered into to manage price risk for its 2005-2009 production volumes. It said it would "continue to highlight the earnings impact of these positions, which were a mark-to-market liability of $353 million at September 30, 2005."
The derivative contracts provide price protection on a portion of the E&P segment's anticipated production. The losses were offset by a $45 million mark-to-market gain on the Cordova tolling agreement, as power futures prices increased more than natural gas futures prices during the quarter. However, El Paso warned "results from this segment will remain volatile" as it scales back its trading activities to focus primarily on marketing its equity production.
The quarterly losses also included a $159 million loss in the Power segment on El Paso's investment in the Midland Cogeneration power plant and $31 million in losses related to a contract buyout and asset sale of the Field Services segment. The losses were offset by a $109 million gain on the sale of El Paso's interest in a power plant in Korea and a $1 million gain in the Pipeline segment.
Quarterly pipeline earnings exceeded El Paso's forecast, and year-to-date capital expenditures were below plan. Foshee also trumpeted the continued success in market and supply expansions, as well as the company's remarketing of existing capacity. The pipeline segment earnings rose 1.5% to $272 million from $268 million in 3Q2004.
However, the two hurricanes' damage to third party processing facilities continue to impact gas flows on El Paso's three major offshore pipelines, ANR, Southern Natural Gas (SNG) and Tennessee Gas Pipeline (TGP). Pre-Katrina, the three pipelines were flowing a total of 4,970 MMcf/d.
ANR's pre-Katrina flow was 1,300 MMcf/d; post-Katrina, shut ins totaled 400 MMcf/d, and Rita shut in the remaining gas. As of Oct. 31, only 300 MMcf/d remained shut in on ANR, El Paso said.
Pre-Katrina, SNG's flow was 1,220; post-Katrina, 520 MMcf/d was shut in and post-Rita, 920 MMcf/d was shut in. As of Oct. 31, SNG had about half of its gas flow, or 645 MMcf/d, still shut in.
Pre-Katrina, TGP's gas flow was 2,470 MMcf/d; post-Katrina, 900 MMcf/d was shut in, and post-Rita, about 1,600 MMcf/d total had been shut in. As of Oct. 31, about half of the flow remained shut in, or 1,200 MMcf/d.
"We have made significant progress restoring our facilities," Stewart said. Processing the gas for the ANR and SNG pipelines is "not expected to be a constraint," with facility recovery substantially complete by year's end.
However, TGP still lacks third-party processing facilities, according to Stewart. El Paso is "pursuing third-party processing options," and "substantial" processing is expected to be available by the end of the year. TGP's "facility recovery" is expected to extend into next year, she said. "Flow is also dependent on third-party production availability."
El Paso's revamped Exploration and Production (E&P) turnaround is now complete, Foshee said, even though Hurricanes Katrina and Rita caused a "moderate setback." Profit from E&P rose 13% to $169 million from $150 million a year earlier. Including unconsolidated affiliate volumes, El Paso's average daily production volumes on- and offshore were 3% lower sequentially than in 2Q2005.
Hurricanes Katrina and Rita reduced offshore E&P volumes by 39 MMcf/d in the quarter, however, offshore production still rose slightly. About 45% of the 205 MMcfe/d produced offshore pre-Katrina is flowing, and 88% is expected to be ramped up by December. The remaining output, which includes 15-20 MMcfe/d operated by third parties, is projected to be restored by the end of 1Q2006, said Lisa Stewart, chief of El Paso's unregulated businesses.
In the two storms, El Paso lost one offshore platform during Katrina, which was producing 1 MMcfe/d. There also was damage to 13 of El Paso's offshore platforms, ancillary damage to 35 platforms, and level I and II inspections were required on 62 platforms. Total repair costs are expected to be less than $20 million. Continuing hurricane repairs by third parties also are expected to impact 4Q2005 earnings by $20-40 million.
Onshore, the news was brighter, with volumes up 18% sequentially from 2Q2005. Foshee credited improved drilling efficiency and a record of successful acquisitions for the upturn in performance. "The capital we're spending is, on balance, much lower-risk capital, and on balance, the value is much higher."
With the performance, he said El Paso remains on target to hit a production exit rate of 860-900 MMcfe/d, excluding production deferred into 2006 by the hurricanes.
Net debt, which El Paso has been working hard to trim, actually rose sequentially to $17 billion in 3Q2005 from $15.9 billion at the end of 2Q2005 because of acquisition costs and higher cash collateral costs. However, the increase is expected to be reversed by the end of the year.
"The increase in net debt is a temporary phenomenon," CFO Mark Leland said during the conference call. El Paso's year-end debt likely will fall between $15-15.8 billion, he said. Leland said El Paso also is expected to file with the Securities and Exchange Commission in the next few weeks to prepare for an equity issue in 2006.
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