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El Paso Expects to Post Higher-than-Expected 2008 Profit

El Paso Corp. Thursday said it is on track to post "sharply higher" full-year earnings than originally forecast following a solid quarterly performance from its natural gas pipeline and exploration businesses.

The nation's largest gas pipeline operator posted 1Q2008 net income of $219 million (29 cents/share), down 65% from 1Q2007's $629 million (29 cents). The prior period included earnings related to the sale of the ANR Pipeline. Excluding one-time items and discontinued operations, quarterly earnings rose to 33 cents/share from 18 cents. Revenue, boosted by surging gas prices, jumped 24% from a year ago to $1.27 billion.

"The environment for both of our businesses is terrific," CEO Doug Foshee told financial analysts during a conference call Thursday. "Gas prices are high," and "new pipeline infrastructure is needed at an unprecedented pace...There is a significant limited downside for El Paso's exposure in 2008 relative to gas prices, and we should replicate that for 2009."

The 1Q2008 results were the first in two years to include free cash flow to the company, and the extra cash is coming at a particularly opportune time.

El Paso has been "given the opportunity to participate in the run-up of gas prices," said Foshee. El Paso's earnings guidance for 2008 had earlier assumed a gas price of $7.50/Mcf and an oil price of $70/bbl. "We're quite bullish where we are for the year."

The pipeline group's net earnings in the quarter rose 4.7%, and throughput was up 7.1%. The results, said pipeline chief Jim Yardley, were driven by several expansion projects that went into service over the year, favorable fuel costs and normal winter weather. Yardley also said El Paso's proposed Ruby Pipeline, which would carry natural gas from the Rockies to West Coast markets remained in the mix, but it was not yet a certain deal (see related story).

El Paso's exploration and production (E&P) business saw its earnings jump 35% from a year ago. Oil and gas volumes rose 8% before asset sales; excluding the sales, volumes were up 4% from a year earlier. Besides rising output, the E&P unit was helped by higher commodity prices, which partially offset a $35 million mark-to-market loss relating to hedging losses.

E&P President Brent Smolik told analysts that the company has about 2.8 Tcf of nonproved risk resources, with 2 Tcf of that in unconventional onshore U.S. basins. Top prospects include the Pierre field, which is a coalbed methane play in the Raton Basin. Also on the horizon are drilling tests in the Cotton Valley tight gas play in East Texas and the emerging Haynesville Shale in northwestern Louisiana.

Cotton Valley and Haynesville Shale well tests are scheduled to be completed this year, Smolik said. The first Haynesville Shale well is scheduled to be drilled before the end of June. "If that well is successful, we'll drill more wells later this year," he said. At least two Cotton Valley horizontal wells also are scheduled to be drilled this year.

The test wells "will give us a better understanding of the economics and the impact" of the plays," Smolik said.

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