El Paso Corp. last week reported its fourth straight profitable quarter, the longest stretch since 2000, but the news received a mixed reaction from analysts and shareholders.
The Houston-based pipeline operator and producer reported that its 4Q2007 net income reached $151 million (21 cents/share), up from a loss of $175 million (minus 25 cents) for the same period of 2006. Earnings from continuing operations jumped to 21 cents/share from a loss of 3 cents in 4Q2006. Wall Street analysts had forecast earnings of 29 cents/share on average.
Since CEO Doug Foshee took over in September 2003, El Paso has more than halved its $22 billion in debt by selling off assets, revitalizing its exploration and production (E&P) business and continuing to strengthen its mainstay gas pipeline business.
"During the year, our pipeline group placed more than $500 million of projects into service while expanding our committed project backlog to almost $4 billion," he said. "Our E&P business also had a very good year, with 8% production growth, as well an 18% increase in proved reserves and lower unit direct lifting costs. We enter 2008 with a strong balance sheet, visible multi-year growth in hand and opportunities to add to our growth trajectory."
Pipeline earnings before interest and taxes (EBIT) in the final quarter rose 2% to $308 million from $302 million a year earlier. Throughput jumped 11% with the biggest gains in the Rocky Mountains and southern regions. The pipe unit benefited from incremental revenues from several expansion projects placed into service and higher transportation revenues from increased sales and capacity. Offsetting these favorable results were higher operating costs for repair and maintenance and increased insurance costs.
The E&P segment's EBIT jumped 92% to $263 million from $137 million in 4Q2006. Higher production volumes and higher realized commodity prices propelled the rise, which benefited from hedging gains that added 59 cents/Mcf to the realized price for natural gas produced.
Natural gas-weighted output jumped 11% to the equivalent of 847 MMcfe/d, partially boosted by the acquisition of Peoples Energy last year (see NGI, Aug. 20, 2007). In 4Q2006 El Paso's output averaged 762 MMcfe/d. Despite industry inflation, total per-unit cash operating costs decreased to an average of $1.83/Mcfe in the quarter, compared with $1.91 a year earlier. El Paso credited the improvements to reduced unit direct lifting costs resulting from lower workover activity levels.
El Paso's average realized price for gas in 4Q2007 was $7.16/Mcf, which was 16% higher than the same period a year ago. Oil, condensate and natural gas liquids earned on average $77.47/bbl, up 53%.
The positive report led to a mixed reaction on Wall Street. On the day of the news El Paso's share price fell slightly to end the day at around $16.79/share. At midday Friday the stock was trading down to $16.32/share after opening at $16.77.
Some Wall Street analysts, however, were encouraged by the earnings report.
Atlantic Equities LLP analyst Nathan Judge said El Paso's "core operations were bang on-line and showed strong growth."
During a conference call to discuss the results, analyst Maura Shaughnessy of Boston-based MFS Investment Management questioned Foshee about whether El Paso's board of directors might consider splitting the company's business units to ensure full value for its two business units. (MFS owned 2.685 million shares of El Paso stock on Oct. 31, 2007.)
Even though the pipeline and E&P businesses in the past year have been "unbelievable performers," she said, El Paso's stock price has "clearly underperformed." She asked Foshee to "speak to the frustration level" of the board and management team and whether there have been any discussions of "splitting up the company..." if the share price is not valued "appropriately in contrast to all the things that have happened."
"I can't say I'm pleased with the share price performance with 2007," said Foshee. But in the long term, and in comparison with El Paso's peers, "I am pretty pleased. If you look at the bulk of our so-called integrated peers, almost without exception all of those that outperformed in 2007 were in the gas manufacturing business, and it is a very attractive place to be..."
Foshee said comparing El Paso to some of its peers was "not exactly an apples to apples comparison...[but] we are creating long-term value for our shareholders. All of us, both on the management team and the board, are aligned with what we have to do in the long term."
El Paso, he said, has been taking specific actions over the last four years to enable it to make the "right decisions" today. "There's no question, no matter how you slice the numbers...we have created value since 2004..."
Shaughnessy said she thought the pipeline business "clearly warrants a premium multiple, it always has...," but "on an asset-value basis, there is still a very wide gap there that we are still trying to understand..."
However, the CEO explained that El Paso has had its "first full year of operations" from its two core businesses. "With respect to how the market views that and with respect to what we agree is a gap between intrinsic value and where we are trading, this year we came out with multiple-year guidance, not for one business but for both. That puts us in a very competitive position. As we deliver on that, the expectation is to see the value gap close. If it doesn't, we know what we have to do."
Separately, El Paso reported that it had an estimated 2.8 Tcfe of risked and 6.1 Tcfe of unrisked nonproved resource potential in addition to its 3.1 Tcfe of proved natural gas and oil reserves at year-end 2007. Risked and unrisked nonproved resource potential are estimates of potential reserves, while proved reserves are seen as recoverable.
Through Feb. 22, El Paso has hedged more than two-thirds of its estimated 2008 equivalent production -- 188 trillion Btu -- at an average floor price of $7.94/MMBtu and an average ceiling price of $10.21/MMBtu. In addition, El Paso hedged 3.7 million bbl of oil at an average floor price of $80.94/bbl and an average ceiling price of $81.44/bbl.
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