El Paso Corp.'s share price on Thursday jumped almost 6% on news that the company's 2010 performance and plans to deliver double-digit earnings this year should be enough to return the company to investment-grade status by 2012.
Most of the $8 billion backlog of natural gas pipeline projects -- including the long-awaited Ruby Pipeline -- are expected to be completed by year-end, said CEO Doug Foshee. He and his management team spoke with financial analysts during a conference call Thursday.
El Paso's pipeline backlog was "the historic peak for infrastructure projects for the company," said Foshee. "Having said that, we see significant growth opportunities for the pipes...driven by needs for our customers.
"As the gas market continues to change, the shift in supply patterns in shales, the shift in demand patterns as we get further out in time and shift from coal to natural gas, our incumbent footprint puts us in a position to take advantage of that."
In addition to five major pipeline and liquefied natural gas projects and expansions expected to begin service this year, the company also is advancing exploration in its Eagle Ford and Wolfcamp shale programs in Texas. More assets this year also are to be sold to the master limited partnership, El Paso Pipeline Partners LP.
"Our progress will continue in 2012 when we expect to generate significant free cash flow, regain an investment grade profile and deliver double-digit earnings growth," Foshee said.
Projected capital spending in 2011 is $3.2 billion, which includes $1.3 billion to complete the pipeline backlog.
Pipeline chief Jim Yardley said the "big focus" this year is the Ruby Pipeline, which still is slated for ramp-up in June. Four expansions also are to begin service in 2011 including:
"In total, the expansions represent the same amount of invested capital as Ruby," Yardley told analysts. "Essentially, we will complete our backlog by the end of the year...90% is contracted for the long term, and we have a very good line of sight on revenue strengthening going forward."
Ruby, which will transport gas from the Rockies to West Coast markets, today is 70% "welded out," compared with 30% last November, said Yardley. "We made a decision to add another spread in Utah, which was a good one. We were able to complete the mountainous section before winter snows...
"We've had a snowy winter through the West, across Utah, Nevada and southern Oregon...more precipitation than normal, more snow and rain, and it slowed construction on some spreads...We could end up near the high end of the overrun range of 10-15%," he said. Ruby originally was scheduled to go into service in March 2011 at a cost of about $3 billion.
"The major issues we still face are weather for the remainder of winter, the pace of permitting -- three short sections still need cultural clearances -- and finally, fish and game habitat and nesting issues," Yardley said. "Weather is the most important factor."
Another $1.3 billion -- or more, depending on the market and commodity prices -- is to be spent in the company's four primary U.S. exploration and production (E&P) programs. More than half of the drilling focus this year will be on oily shale plays, said E&P chief Brent Smolik.
El Paso is forecasting a jump in total production this year by as much as 7% over 2010, with oil output on track to increase 30-40%, Smolik said. He also said El Paso still is considering whether to bring aboard a joint venture partner in its Eagle Ford leasehold.
The company is focused mostly on oily and liquids plays this year but it could increase gas drilling projects, said Foshee. However, it will take more than higher gas prices, he said.
"It's not just the natural gas price," said the CEO. "It has to be a combination of price duration in absolute terms and service costs. It's hard to see service costs coming down dramatically...in a $95 oil price environment...We're probably talking north of $5.50 to see a significant increase in natural gas drilling outside the core Haynesville [Shale]."
Asked whether El Paso was looking past this year's completions to new opportunities, Foshee said the company was "constantly looking for new opportunities. Having said that, we are reporting on the biggest set of opportunities we've ever had. We've got lots of good capital to spend in our backyard..."
Quarterly results are scheduled to be issued on Feb. 24.
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