Moody's Investors Service last week placed El Paso Corp. and its subsidiaries under review for a possible upgrade, reflecting the possibility the Houston-based company will reduce more of its debt in the near future than previously expected and because there are "signs of recovery" within its revamped exploration and production operations.
El Paso also has shown progress in reducing its business risks and contingent liabilities, said Moody's analyst John Diaz. The positive factors, he said, combined with a large available cash balance, help to improve the outlook for its near-term liquidity and its credit profile overall.
Moody's plans to review El Paso's 2005 10-K and its 1Q2006 results. The ratings agency expects to conclude its review in the next three months. Given the transitional state of the company, the review could result in a positive outlook, a one-notch upgrade, or a combination of the two, it said.
"We believe that EP is set to accomplish a number of its 2006 credit improvement objectives early this year," said Diaz. "The company has more than sufficient cash on hand to retire $615 million of its zero-coupon notes, this year's largest single debt maturity, at their scheduled put date at the end of this month. EP also has over $1 billion of contracted asset sales, which are expected to close during the first half of this year, and which would help to reduce $3 billion of debt as it plans this year."
Diaz said Moody's will analyze the company's ability to generate operating cash flow in line with its expectations and to reach a sustainable free cash flow (net of capital expenditures) position from its core pipeline and production businesses.
"Prospects for the production unit would be a key consideration in our analysis, since an improvement in EP's earnings and cash flows would depend greatly on the company significantly raising production volumes as it projects."
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