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El Paso CEO Says E&P Turnaround Nearly Complete

El Paso Corp. CEO Doug Foshee said Tuesday the company is close to completing a massive restructuring program that has whittled away 18 operating divisions, cut its work force by more than 9,000, reduced debt by nearly $5 billion and sold $5.7 billion in assets over the last couple years. He said El Paso's two remaining divisions, pipelines and exploration and production (E&P), are well positioned for growth, given strong gas demand, high commodity prices and some internal strategic changes.

"We are very confident in the completion of the turnaround of the E&P business," he told analysts at the annual Bank of America investment conference Tuesday. "Our program is creating value at planned prices, much less the current forward curve. The business is becoming much more predictable because we are lengthening the reserve life and lowering our natural decline rates and we have a very strong outlook for 2006."

New management at El Paso's E&P business made significant changes in the last year and a half, in particular stabilizing production and focusing on lower-risk prospects onshore. Lisa Stewart, an Apache Corp. E&P veteran, took over the operation early last year just days before the company announced it would take a $1 billion charge on reserves revisions. El Paso cut its reserves by 41% following an independent audit (see Daily GPI, Feb. 18, 2004; Jan. 13, 2004).

The division also missed its production targets for 2005, but Foshee said it is expected to restore production to 890-900 MMcf/d by the end of the year from a recent low of about 810 MMcf/d at the beginning of this year and a peak of 900 MMcf/d in the first quarter of 2004.

The E&P division's onshore production is expected to almost double as a percentage of the company's total production this year, going to 47% of the total from about 25% in the first quarter of 2004, he said. Meanwhile, El Paso's reserves to production ratio also has grown from 6.2 to 7.4. About 80% of its reserves are now in core onshore areas.

In addition, Foshee said several E&P problems of the past have been corrected. Instead of focusing on deep, expensive Texas Gulf Coast wells with 100% working interests, for example, the company has instead started to build an inventory of low-risk, shallower prospects that may have smaller reserves but cost far less to find and develop.

"This is not meant to show that we believe that you should expect that we have completed our task," he said. "It is just meant to show that in a very few months with a redirected focus, the management talent in charge of [the Gulf Coast Texas] has shown marked increase in performance."

Foshee also said if prices stay at $10/MMBtu rather than $5, El Paso's E&P business could be seeing an additional $670 million in incremental cash flow next year, assuming 2006 production from the company is about 904 MMcf/d, the high-end of the expected 2005 exit rate.

"We expect natural gas fundamentals to remain strong, which we believe bodes well for both of our two core businesses -- the E&P business, which is commodity-driven, as well as our interstate pipeline franchise," he said.

El Paso plans to spend $400-500 million/year in growth capital on pipeline expansion projects over the next several years due to gas demand growth that should approach 30 Tcf by 2015. More than $20 billion in new infrastructure industrywide will be required to meet the projected gas demand growth over the next five years, Foshee said.

Foshee also outlined about $100 million in additional annual cost savings that are expected over the next few years without any additional staff reductions. Among the savings items is a reduction in trading costs. He said El Paso's trading book has shrunk from a peak of about 40,000 contracts to less than 4,000 contracts today. Over the next few years, those legacy agreements are expected to be reduced to zero.

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