J.P. Morgan Securities downgraded El Paso Corp. to “underweight” from “neutral” last week, citing “significant concerns” regarding its oil and natural gas production. The downgrade sent El Paso’s shares tumbling nearly a dollar, or 8.23% by market close.
Analyst Gabe Moreen said he had valuation concerns about El Paso’s production stabilization, which he said was stretched, and he lowered forecasts for 2005 and 2006. He also suggested that write-offs were possible at El Paso’s international business.
Although the near-term stabilization in production levels between September and October is a positive, Moreen wrote that there were “several negative catalysts that may play out over the near-to-medium term. Given current valuations and expected catalysts, we do not see risk/reward to El Paso equity holders as favorable.”
Moreen said he expects management may revise its production guidance downward. The company slashed its oil and gas reserves by 41% earlier this year, and it also dropped its production guidance through the rest of this year because of asset sales. J.P. Morgan is now forecasting 2005 and 2006 volumes to be 800-820 MMcfe/d, which would be down from El Paso’s guidance of 830-850 MMcfe/d.
El Paso did not comment on the downgrade.
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