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El Paso Prepares for 'Capital Intensive' 2010

El Paso Corp. on Thursday unveiled plans to fund $4.1 billion in capital development in 2010, with almost three-quarters of the total amount set aside for domestic natural gas pipeline projects -- including the Ruby Pipeline. Another $1 billion-plus will go to develop mostly domestic exploration and production (E&P) projects.

Speaking to financial analysts in New York City, CEO Doug Foshee said the company was on track for earnings to exceed 15% growth a year through 2012 with "substantial" free cash flow. The Pipeline Group's earnings are forecast to average "greater than 8% a year," while the E&P unit is on track for 10%-plus earnings growth over the coming two years.

"I have a high degree of confidence in that," Foshee said of the earnings forecast. "El Paso is finishing one of its best years ever operationally...Our pipelines continue to execute extremely well on the construction of our committed backlog, while developing new opportunities for future growth, such as the Marcellus Shale." Domestic E&P operations "have exceeded expectations," and "we enter 2010 with excellent momentum."

To prepare for a "capital intensive year," El Paso announced in early November that it was cutting its dividend, selling assets and reducing internal costs to fund the launch of nearly $1 billion in natural gas pipeline projects and pay for about $1 billion of E&P projects (see NGI, Nov. 9).

Most of the budget for the coming year will go to backlog of new additions to the Pipeline Group, which is targeting 2010 adjusted earnings of $2-2.1 billion on a $2.9 billion capital budget, said pipeline chief Jim Yardley.

Around $500 million is for maintenance capital; $2.4 billion is allocated to growth projects, including $1.7 billion for 100% of El Paso's costs for the $3 billion Ruby Pipeline, which would carry 1.3-1.5 Bcf/d of gas supplies from the Rockies to West Coast markets (see NGI, Sept. 7).

"In early January we expect to receive the final environmental impact statement for Ruby," said Yardley. And by the end of February El Paso expects to have a certificate to proceed with construction from the Federal Energy Regulatory Commission. Once it has federal approval in hand, construction should begin in May or June. "Then we'll be off and running. Our teams are itching to start production."

Most of the pipe unit's backlog of committed pipeline and liquefied natural gas projects and expansions are scheduled to be placed into service by the end of 2011. "A significant amount of the construction and materials price risk of these projects has been mitigated," Foshee said, and the company expects to deliver its construction backlog on time and on budget.

Besides the Ruby Pipeline, four other major projects will be under way in the coming year:

Almost all -- $900 million -- of the E&P capital spending in 2010 is allocated to domestic programs, and roughly half of the domestic dollars will target development in the Haynesville and Eagle Ford shales and the Altamont oil program. El Paso expects to produce 720-760 MMcfe/d in 2010, E&P chief Brent Smolik said.

"Our U.S. production is going to exceed the original guidance we had for the year by about 25,000 Mcf/d to 30,000 Mcf/d," Smolik told analysts. "We've significantly progressed our shale program and found ways to grow our inventory and our proved reserves this year."

El Paso's total gas and oil reserves at the end of 2008 were 2.4 Tcfe, and "we think that will be somewhere around 2.6 to 2.7 Tcfe when we finish our reserve work for this year," he said. The company has begun developing more oily projects outside North America but overall, the company is still "mostly gas-focused and over 85% of our program is still gas."

With the drop in gas prices, the E&P chief said El Paso continues to upgrade its portfolio and focus on the most economical plays.

"We've seen savings this year in capital and operating expenses of about $45 million, and that's partially as a result of our reorganizational effort," he said. The company has migrated "to the onshore part of our Gulf Coast division" where it's now focusing on the emerging Eagle Ford Shale in South Texas.

"Eagle Ford is obviously a very large resource for us and it appears profitable but we're still very early in the play," said Smolik. "Like our approach in Haynesville, if we have success early on, we have the ability to ramp that program up."

For 2010, most of the E&P budget will target the Haynesville Shale in both Louisiana and East Texas. El Paso plans to spend $248 million across the region in the coming year and plans to spud 10 wells gross.

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