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El Paso CEO: Company Starting to 'Hit on All Cylinders'

Houston-based El Paso Corp.'s share price jumped on Friday with the news that its quarterly net income tripled to $356 million (49 cents/share) from $106 million (17 cents) for the same period a year ago. For the remainder of 2006, "the only real negative," said CEO Doug Foshee, is the recovery cost from last year's twin hurricanes, which will be about $160 million more than initially forecast.

Earnings from continuing operations were 52 cents/share, up from 18 cents in 1Q2005. Wall Street had expected El Paso to earn on average 27 cents/share. Quarterly profit included $162 million (14 cents/share) on noncash gains from oil and natural gas hedges, compared with a $106 million loss in 1Q2005. Revenue was up 41% to $1.53 billion, ahead of the $1.3 billion analyst consensus. Cash flow from continuing operations soared to $949 million, compared with only $51 million in 1Q2005.

"We think we're starting to hit on all cylinders as a company," said Foshee, who presided over a conference call with his management team. "We're in really good shape to hit our earnings goal in 2006...This quarter reflects the continuing improvement in the quality of our earnings, more than just our pipeline and E&P earnings...We took a great step forward this quarter in showing what El Paso can do. It is shaping up to be a breakout year."

On the news, investors sent the share price up more than 9% by midday Friday, when El Paso was trading at about $14.76/share. At the same time a year ago, El Paso's stock price was hovering around $10/share. Wachovia also upgraded the stock on Friday to "outperform" from "market perform."

Before interest and taxes, earnings in El Paso's bread-and-butter Pipeline segment grew 16% to $478 million from $412 million a year earlier. The increase was primarily attributed to new rates at El Paso Natural Gas (EPNG) and the expiration of discounted rates to some EPNG customers, as well as higher sales of firm and interruptible capacity on other pipeline systems and contributions from expansions including Cheyenne Plains. The segment's quarterly results benefited from a favorable price revaluation of natural gas imbalances, which were partially offset by the higher hurricane repair costs that were not fully reimbursed by insurance. Results also were favorably impacted by a contract restructuring on ANR Pipeline.

El Paso's proposed Continental Connector pipeline continues to draw interest, and most likely will be built in segments, said Jim Cleary, president of the company's western pipeline group (see related story). Cleary announced Friday that Oklahoma City-based Chesapeake Energy Corp. has signed a binding precedent agreement to transport its Midcontinent gas production from western Oklahoma to the Perryville Hub in North Louisiana. Foshee said Chesapeake had "committed to 175 million Dth/d, and it could be more than that. It's a substantial anchor for that project." Based on its commitments to date, El Paso expects to secure support for a 1 Bcf/d pipeline, with service beginning in 1Q2008.

Earnings within the revamped Exploration and Production (E&P) segment climbed 9% to $199 million from $183 million a year ago. Consolidated production volume averaged 694 MMcf/d, down from 766 MMcf/d for the same period a year ago. Lisa Stewart, E&P president, said the drop related to shut-ins from hurricane losses a year ago.

"The repairs are taking longer than we projected in the Gulf of Mexico," and about 40 MMcfe/d remains shut in, she said. "But the repairs are on track." She said El Paso's current volume is in the "770 MMcfe/d range," and by the end of the year, "we should be above 900 million." El Paso's forecast is for production to range between 825-850 MMcfe/d, but Stewart said "momentum" from growing operations in the Rockies, South Texas and along the Gulf Coast should push the company's output higher than expected. None of the expected rise will come from acquisitions, she said -- all of it will be organic.

The Marketing and Trading segment reported earnings of $208 million, compared with a loss of $185 million for 1Q2005. Quarterly results were primarily driven by $162 million of noncash, mark-to-market gains on derivatives intended to manage the price risk of the E&P segment's gas and oil production and a $49 million, noncash gain associated with the assignment of two gas supply contracts.

The company's average realized price for oil, condensate and natural gas liquids was $50/bbl in the quarter, up 28% from a year ago. Average natural gas prices were $6.79/Mcf, including hedges, compared with $6.10 a year ago.

El Paso also has entered into options contracts to hedge 2007 gas volumes. In total, the new positions create an $8.00/MMBtu floor price and an average ceiling price of $16.02/MMBtu for 130 TBtu of anticipated 2007 production. These positions replaced option contracts in the Marketing and Trading segment that created a $6.00/MMBtu floor for 30 TBtu, as well as a $7.00/MMBtu floor and a $9.00/MMBtu ceiling for 21 TBtu of production.

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