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El Paso Sees Industrial Turnaround, Shales Lifting E&P

El Paso Corp., which reported a 62% jump in profits in the last three months of 2009, is seeing a significant increase in industrial use and "signs of a turnaround" in its natural gas pipeline unit, as well as a "supply push" from its U.S. shales, the company's pipeline chief said last week.

Jim Yardley, who leads the Houston-based company's pipeline segment, told financial analysts during a conference call that his unit has begun to see signs of recovering economy in the new year.

There's been a "significant increase from the industrials," Yardley said of the pipeline results in late 2009 and early 2010. "We see that clearly in the Southeast in particular relative to a year ago. On the supply side, we think the supply push is coming out of the Haynesville [shale] clearly..." And the unit is seeing "big new volumes coming on in the Marcellus."

Others in the industry were backing up the optimistic outlook. BP plc's management team, during a strategic meeting last week, also reported seeing signs of a turnaround in the economy (see related story). And gas-weighted industrial production increased 2.2% year/year in December, according to the Energy Information Administration (see related story).

A year ago at this time, Yardley said, "we probably weren't taking much at all" into El Paso's Tennessee Gas Pipeline (TGP) in the Marcellus Shale. "Now we're up to over 300 MMcf/d. That's provided us with obviously good opportunities revenue-wise. It's displaced some of the volumes coming in from Canada. The Canada fall-off we see very clearly, and a lot of that is happening coming into the Northeast, some into the Midwest, less so into the West right now."

Competitor Rockies Express Pipeline volumes are increasing, "so the dynamics on TGP are changing, but for the most part, for TGP, there's clearly much more opportunity than risk there," said Yardley.

He told analysts the pipeline unit would "continue to see earnings growth as we execute our backlog of growth projects."

"We placed four more [projects] in service in 2009 on time and essentially on budget," and last week placed "two big ones in service: the expansion of our Elba Island Terminal and its associated Elba Express Pipeline also on time and budget" (see related story). In addition, the Ruby Pipeline Project, proposed to carry gas from the Rockies to West Coast markets, "continues to meet milestones toward the start-up of construction in late spring," said Yardley.

Based on early success in the Haynesville and Eagle Ford shales, El Paso raised its production guidance for its E&P Group for 2010 by 20 MMcf/d to 740-780 MMcf/d. Despite a reduction in spending last year, the E&P unit grew proved reserves 8%, reduced its domestic reserve replacement cost to $1.57, and delivered production volumes at the high end of its full-year 2009 guidance.

"We got some benefit from deflation but a lot of our progress is due to the efforts of our production operations team," said E&P Chief Brent Smolik. The E&P shift is to the U.S. onshore with "more predictable opportunities, and those shifts are visible in our improved domestic reserve replacement cost of $1.57. And our unproved resources grew significantly as well. We had a 44% increase in risked resources that came mostly from the Haynesville and Eagle Ford shales."

Smolik noted that the Haynesville play "was a fairly minor contributor as we began 2009, and now [it] generates more production than any other single asset...It's currently close to 15% of our total net production. During 2009 we went from one rig to five rigs, with excellent drilling and completion performance throughout the year."

El Paso now has 25 wells producing in the Haynesville, and "across the board results continue to be ahead of our models," said Smolik. "In the Holly area, which constitutes about half of our acreage, the well results are still excellent. The average of 30-day IP [initial production] rate in those wells is in excess of 17 MMcf/d.

"More recently, we've been dealing wells outside of Holly and the results continue to be very encouraging. The last five wells in this area have averaged IP 30-days exceeding 10 MMcf/d. So the story here is still positive overall."

"It's still early days for the Eagle Ford," he said, "but it's moving quickly thanks to our Haynesville experience."

El Paso's net profits to $274 million (38 cents/share) in 4Q2009 versus a loss of in 4Q2008 of $1.48 billion (minus $2.43). Adjusted for one-time items, El Paso earned 34 cents/share versus 21 cents/share in 4Q2008, which was seven cents above Wall Street's consensus forecast. For the full year El Paso reported a net loss of $576 million (minus 83 cents/share) in 2009, compared with a net loss of $860 million (minus $1.24) in the prior year.

"If past is prologue, then 2010 is shaping up to be an outstanding year," CEO Doug Foshee told financial analysts. "Our fourth quarter results reflect a strong finish to an exceptional 2009 performance for team El Paso. I am extremely proud of the way our management team and employees delivered on our goals in one of the most challenging economic environments since the Great Depression.

"Our pipelines delivered excellent earnings growth, while continuing to execute very well on the construction of our backlog of pipeline and LNG [liquefied natural gas] projects. In addition, the operating performance of our E&P company was the best since I joined the company in 2003."

Among other things the Houston-based company reduced its cost structure, increased its reserves and generated cash flow in excess of capital spending, Foshee noted. "We are off to a strong start and have already made significant progress toward our 2010 goals."

El Paso's Pipeline Group earned $367 million in the last quarter of 2009, up from $319 million a year earlier. The 4Q2009 results benefited from higher reservation revenues because of several expansion projects that went into service throughout 2008 and 2009, which included the Medicine Bow, Carthage, Cheyenne Plains compression expansion, Wyoming Interstate Co.'s Piceance Lateral and Concord Lateral expansions, and the High Plains Pipeline and Totem Gas Storage projects.

The pipeline business also was favorably impacted because of lower maintenance expenses associated with repairs for damages from hurricanes Ike and Gustav, and from the $8 million gain from sale of Colorado Interstate Gas Co.'s Natural Buttes compressor station and gas processing plant.

However, pipeline throughput decreased 3% last year -- the first decline in several years, noted Yardley.

"For the first year in many our throughput decreased by 3%," said Yardley. He blamed the drop on the "economic slowdown" in 2009 and said the lower throughput had only "a minor impact on our financials because of the demand charge nature of our business." El Paso's system was "impacted both by lower industrial demand, particularly in the Southeast, and a mild summer in the Northeast."

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