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CEO: El Paso 'Undervalued,' Structural Changes Possible

El Paso Corp.'s annual financial analyst meeting last week did nothing to quell talk that the company may restructure and split its bread-and-butter natural gas pipeline business from the exploration and production (E&P) unit to increase shareholder value. In fact, the CEO indicated it is a distinct possibility.

The Houston-based company's stock price has hovered around $14.80-18.50/share over the past year; at midday Friday it was trading at around $17.60/share. Meanwhile, El Paso's peers were faring better: The Williams Cos. Friday was selling for around $36.42, Enbridge Inc. was at $42.38, Spectra Energy Corp. was at $24.95, and Kinder Morgan Energy Partners LP was selling for around $58.19.

"Anyway you slice it, we are undervalued in both absolute terms and relative terms compared to our peers," CEO Doug Foshee told analysts. Investors, he said, have not properly valued El Paso's potential natural gas reserves nor its controlling interest in El Paso Pipeline Partners LP, the master limited partnership (MLP) that it spun off last year (see NGI, Nov. 12, 2007).

Foshee, who took over the company in 2003, said he is a big believer in El Paso's future -- he recently purchased $800,000 of company stock. "I have not sold a share in the last five years...I am as closely aligned with you, as investors, as I can be."

The market, however, does not appear to share his sentiments.

"If in the end getting a good valuation requires a structural change, then we are prepared to do that as well," Foshee said. His comments mirrored statements he made during a company meeting in February (see NGI, March 3).

Again asked by an analyst last Wednesday what he might do as CEO if the market does not recognize the company's value implied from its suite of assets, Foshee said his position "hasn't changed at all. The options are obvious. Ultimately, if the value proposition in the stock is hindered by the structural formation of the company...meaning E&P and pipes together," the two business units "aren't together" in the future.

Foshee cautioned investors and analysts to "look at the management incentives" for wanting the company's two business units to work together. The management's incentives for the company to succeed "are absolutely aligned with the shareholders...Management does have the capacity and the intent to do what's right for the shareholders..."

For instance, El Paso last year did something that he thought would never happen: it sold its prized ANR Pipeline Co. (see NGI, Feb. 26, 2007).

"Without rehashing all of it, we have a pretty decent track record of doing some very decent things, which includes selling ANR," he said. The odds of selling ANR even two years ago were "very low. I walked around for...years saying that the pipes were the cornerstone of El Paso. Selling the pipeline was an unnatural act. Yet when we went through the data, it had relatively low growth for our portfolio...though the earnings were relatively strong...It was one of the few things we could do to fix the balance sheet...So we did it."

The MLP launch, just a week before Thanksgiving last year, also was a "very shareholder friendly thing," Foshee said. "Frankly the underwriters said it was a long putt, but we structured it correctly and it has outperformed almost every MLP."

The CEO said he could not be specific about when or if changes would be made structurally to the corporation. Of changes within the corporation, Foshee said he would not commit to "say to you that by this date, we're going to do this. But I will tell you that we understand those issues [surrounding the share price], and we're not just sitting here long-term with this gap without taking action."

Without any structural changes, "I have every confidence today that as we roll out our new projects, there will be significant shareholder value" in the longer term, Foshee said. "If you believe the $9 strip [for natural gas prices]," it is unlikely "that we'll end up as an $18 stock."

El Paso's E&P unit trimmed its expected output for this year to 860-920 MMcfe/d, which is 1% lower than a January forecast of 870-930 MMcfe/d. The change reflects the timing of some asset sales, said E&P President Brent Smolik. El Paso's compound annual production growth for E&P still is expected to be 8-12%, Smolik said.

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