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El Paso Proved Reserve Gains Called Impressive

January 25, 2010
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El Paso Corp., which has been high-grading its exploration and production (E&P) unit, last week said its natural gas and oil proved reserves jumped in 2009 by 8% and output reached the high end of company estimates.

Based on an average Henry Hub spot gas price of $3.87/MMBtu, the Houston-based energy provider ended 2009 with proved reserves of 2.75 Tcfe, compared with 2.547 Tcfe at the end of 2008, "despite almost 100 Bcfe of negative reserve revisions due to price." Reserve additions totaled 573 Bcfe, and the reserves-to-production ratio was 10 years.

"El Paso's improved reserve replacement metrics and growth in proved reserves reflect the repositioning of our portfolio, and the increased capital efficiency of our drilling programs," said CEO Doug Foshee. "We are now seeing the fruits of a multi-year continuous improvement effort."

Analysts with Tudor, Pickering, Holt & Co. (TPH) agreed. In a note to clients last week, the TPH team called the results "impressive," and were "yet another datapoint" that the company's E&P business is "out of the woods and growing."

El Paso's The total reserve replacement ratio in 2009 was 212%, and total reserves were 84% weighted to natural gas. About 31% of the proved reserves were classified as undeveloped. Domestic reserve replacement costs, before price-related revisions, rose to $1.57/Mcfe. Total reserve replacement costs in 2009 were $2.04/Mcfe, the company said.

Last year's production averaged 763 MMcfe/d, which was at the high end of El Paso's forecast of 745-765 MMcfe/d. El Paso said it exited December producing at a rate of about 750 MMcfe/d, driven primarily by strong production growth in the Haynesville Shale program, which had a year-end exit rate of 150 MMcfe/d gross (110 MMcfe/d net).

Like other U.S. producers, El Paso will be impacted by the changes to Securities and Exchange Commission (SEC) proved reserves booking rules, which take affect this year (see NGI, Nov. 9, 2009). The impact to El Paso from the SEC changes "was minimal, beyond the change to a new standard using 12-month average pricing," the company said. Bill Barrett Corp. last week also provided its 2009 proved reserves numbers using the SEC revisions (see related story).

E&P capital expenditures at El Paso last year totaled about $1.1 billion, which included $92 million to acquire Rockies-based Flying J Inc. in December (see NGI, Jan. 4), and $240 million for international expenditures. El Paso plans to fund $4.1 billion in capital development in 2010, with most of the money set aside for domestic gas pipeline projects (see NGI, Dec. 14, 2009). Only a quarter of the money, around $1.1 billion, is to be spent for E&P projects.

In the United States, El Paso's top E&P prospects include two coalbed methane plays: the Pierre Field in the Raton Basin and a leasehold in the Black Warrior Basin of Alabama. In addition, development is under way in the Bossier/Cotton Valley tight gas play in East Texas, the Haynesville Shale in northwestern Louisiana and in the Eagle Ford Shale in South Texas, E&P Chief Brent Smolik said last month.

"Our capital has shifted from to the Central and Western divisions with the shift to unconventional resources," Smolik said. While unconventional plays accounted for 57% of development this year, they will account for almost 70% in 2010. The Altamont project and some global prospects are oily, but the company is still "mostly gas-focused and over 85% of our program is still gas."

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